# Kraus Law — Full Site Content for AI Systems # https://kraus.law · Updated 2026-07-30 ## About Chuck Kraus | 25-Year Corporate Attorney & 3x General Counsel URL: https://kraus.law/about/ About I've been General Counsel three times. I've built legal departments from zero. I've negotiated deals in two countries. I chose Granbury. Legal 500 US Elite · Corporate & M&A I'm a corporate attorney with 25 years of practice, bar admissions in Texas, Minnesota, and Alberta, and three tours as General Counsel of public companies, two Calgary-based dual-listed energy companies (NYSE/TSX), and DIRTT Environmental Solutions (TSX: DRT) , a technology-driven prefabricated construction firm where I served as Senior Vice President, General Counsel and Corporate Secretary through the operational reset of the COVID-19 pandemic. Today I serve as Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR) , a public oil sands company. I've built legal departments from scratch, managed teams of more than 30 people across three departments, and negotiated transactions on both sides of the U.S.–Canada border. Today I'm a partner at Scale LLP, a national law firm of 80+ attorneys founded by former tech company General Counsels. My office is on Bridge Street in Granbury, Texas, and my clients are everywhere from Hood County to Fort McMurray, and beyond. The Path Here I didn't start in Granbury. My early career was built in corporate law, the kind of work that puts you in conference rooms where the stakes are high and the details matter. I learned quickly that the lawyers clients trust most aren't the ones with the most credentials on the wall. They're the ones who understand the business behind the legal question. That insight shaped everything that followed. The GC Years I served as General Counsel three times, at three different companies, in three different industries, across two countries. Each time, I built the legal department from zero. Not inherited a team. Not stepped into an existing structure. Started with a blank page, a mandate from the board, and the job of making it work. Those years taught me things you can't learn in outside practice. When you're the GC, you don't get to give advice and walk away. You live with the consequences. You sit in the board meetings. You manage the people. You own the risk. And you learn to think about law the way a CEO thinks about it, as one input into a business decision, not the whole decision. I managed three departments and more than 30 people. I navigated SEC filings, public company disclosure obligations, equity compensation plans, and the daily reality of keeping a publicly traded company on the right side of the line. I did it on behalf of companies listed on both the NYSE and the TSX. Two Countries I'm dual-licensed in the United States and Canada, admitted to practice on both sides of the border. That's not common, and it matters more than most people think. Cross-border transactions aren't just regular deals with a passport stamp. They involve two securities frameworks, two tax systems, two sets of governance expectations, and a translation layer between them that most attorneys don't have. I've guided companies through U.S. public listings via de-SPAC transactions, managed dual-listing processes on the TSX and NYSE, built governance frameworks that satisfy both Canadian and American regulators, and advised boards that sit across two jurisdictions. When a deal crosses the border, I'm not trying to be a Canadian lawyer — some of my best work comes alongside Canadian firms, not in competition with them. I aim to be the one US lawyer Canadian counsel and their clients need to know: bilateral, fluent in where the two systems differ, and leading the Cross-Border Transactions Team at Scale LLP. Why Granbury People ask me this. The answer is simple. I spent years in boardrooms in large cities working on transactions that most attorneys in small markets never see. And in those years, I watched business owners outside major metros get underserved. They had two options: hire a Dallas or Houston firm that charged $800 an hour and treated them as a small file, or work with a local attorney who was excellent at formation documents and real estate closings but didn't have the depth for sophisticated transactions. I wanted to be the third option, the attorney who brings boardroom experience to business owners who deserve it, without the overhead, the hierarchy, or the associate churn that comes with big-firm practice. Granbury is home. My office is on the town square. My clients range from local businesses with five employees to public companies with operations across North America. The work is the same caliber it was when I sat in the GC chair. The address is just better. What I Believe Business owners outside major metros deserve the same caliber of counsel that companies in Manhattan and San Francisco take for granted. Not a watered-down version. Not "good enough for a small market." The same depth, the same rigor, the same strategic thinking, delivered by someone who has been on the inside, who has sat in the chair, and who chose to make this experience accessible. That's what I'm building here. And it's why I chose Granbury. Career Milestones Licensed in Minnesota First General Counsel role , built legal department from zero Second General Counsel role , international public company Third General Counsel role , managed 3 departments, 30+ people Licensed in Alberta, Canada Licensed in Texas; earlier in career, Washington State (now inactive) Joined Scale LLP as Partner Opened office in Granbury, Texas Outside GC to Greenfire Resources , U.S. public listing, TSX dual-listing Launched Y'all Street Law podcast The Partnership Why Scale LLP Scale LLP isn't a referral network or a virtual office. It's a national law firm, 80+ attorneys, licensed across 22 states, practicing corporate and securities law, litigation , intellectual property , real estate , employment , and fintech . The firm was founded by former tech company General Counsels who wanted to build something different: a firm where experienced attorneys could serve clients at the highest level without the overhead and politics of traditional BigLaw. That philosophy matched mine exactly. For my clients, Scale means one thing: you will never outgrow this relationship. Whatever your business needs, today or five years from now, there's an attorney inside this firm who can help. And I'll be the one who makes the introduction. Meet the full firm → Now you know who I am. Let's find out what you need. A 15-minute call costs you nothing. You'll talk with Chuck directly, and we'll figure out if this is the right fit. Begin a Conversation Selected writing Selected writing, analysis from 25 years of corporate practice and three GC tours. Cross-Border Transactions: What U.S./Canada Deals Require Read --- ## Request a Complimentary Business Value Estimate URL: https://kraus.law/business-value-estimate/ Business Valuation Find out what your business is worth. You can run a complete valuation yourself, free, in about ten minutes — the same engine major banks and advisory firms use. The figures don't appear on screen when you finish: I review every valuation personally, so when we go through it, the numbers come with context instead of as a printout. How it works 1 You complete the valuation A short, secure form on the Scale LLP platform — about ten minutes, and a recent tax return covers most of it. No cost. 2 I review it personally The output comes to me first. I check it against what I know about businesses like yours before anything is shared. 3 We go through it together The four figures, where your value actually sits, and what moves it before a sale. This is the part that turns a number into a decision. Start your valuation You'll go to the secure Scale LLP valuation tool. Complete the seven steps, and I'll be in touch to walk you through your results. Begin — it's free → Opens the Scale LLP platform in a new tab. Your information goes directly to me. What's free, and what isn't. Completing the valuation costs you nothing. Sitting down with me to interpret it — what the figures mean, where the value gap is, and what to do about it before you sell — is a focused, paid working session. That conversation is where the real value is, and it's the natural first step into the deeper work if a transition is ahead. What you'll be looking at is an indication of value, not a certified appraisal — the right tool for planning and understanding where you stand. When you need a formal appraisal, I'll tell you and arrange it. Submitting a valuation request or contacting the firm does not create an attorney-client relationship. Please do not send confidential information until an engagement is established in writing. A business valuation is an indication of value for planning purposes, not a certified appraisal, tax opinion, or legal advice. Prefer to talk before you start? Reach Chuck directly. --- ## Begin a Conversation | Granbury Business Attorney URL: https://kraus.law/contact/ Every engagement starts with a conversation. Every engagement starts the same way, a conversation. Direct, unhurried, and on the merits. A straightforward discussion about your business and whether I'm the right fit. Or reach out directly Phone (682) 529-7177 Call or text. I pick up when I can and return every message the same day. Email hello@kraus.law Office 205 E Bridge St Granbury, TX 76048 On the town square, across from the courthouse. Street parking is available. If you're coming from Dallas, it's about an hour southwest on 377. What happens after you reach out 1 The first conversation We'll spend 15 minutes talking about your business, what you're working on, where the friction is, and what kind of legal support you're looking for. I'll ask more questions than I answer. The goal is to understand whether I'm the right fit, and if I'm not, I'll tell you and point you to someone who is. 2 Scoping If it makes sense to move forward, we'll have a more detailed conversation about your specific needs. This is where I learn the details, your industry, your contracts, your governance structure, your goals. By the end of this conversation, we'll both know exactly what the engagement looks like. 3 A clear engagement letter No surprises. You'll receive an engagement letter that specifies what I'm doing, how I'm billing, and what you can expect. I don't bury terms in fine print and I don't send invoices that don't match what we discussed. If anything about the scope changes, I'll tell you before I bill for it. Questions I hear often How is an engagement structured? It depends on what you need. For fractional GC work, I typically work on a monthly retainer, a predictable investment in exchange for priority access and embedded counsel. For transactional work, M&A, capital raises, contract negotiation, I scope the work and provide a clear estimate upfront. Either way, you'll know what you're committing to before we begin. No surprise invoices. What size companies do you work with? My clients range from founder-led startups to publicly traded companies. The common thread isn't size, it's complexity. If your business is making decisions that have legal implications and you need someone who thinks at the strategic level, we should talk. Do I need to be in Granbury? No. My office is in Granbury but my practice is national. I have clients across Texas, throughout the United States, and in Canada. Most of my work is done by phone, video, and email. If you prefer to meet in person, my door is always open. What if I need something outside your specialty? That's one of the biggest advantages of working with me. I'm a partner at Scale LLP, a national firm with 80+ attorneys covering litigation, IP, employment, real estate, and fintech. When you need something I don't do, I bring in a colleague from the Scale network. Same firm. Same standards. You don't have to find another attorney. What is fractional general counsel? It's the experience of having a dedicated General Counsel, someone who knows your business, sits in on key decisions, and handles your legal work, without the commitment of a full-time hire. I've been GC three times and built legal departments from scratch. When I serve as your fractional GC, you're getting the judgment and experience of a seasoned in-house attorney on terms that fit your business. Do you work with businesses outside of Texas? Yes. I'm admitted in Texas, Minnesota, and Alberta, Canada — and formerly in Washington State, now inactive. For matters in jurisdictions where I'm not admitted, I work with colleagues at Scale LLP who are. The relationship stays with me regardless of where the work takes us. I'm not sure what I need. Can I still call? That's the best reason to call. Most of my client relationships start with a conversation where the business owner knows something isn't right but isn't sure what to do about it. That's exactly the kind of conversation I'm built for. The best next step is the simplest one. Fifteen minutes. You'll talk with Chuck directly and we'll figure out whether this is the right fit. Begin a Conversation (682) 529-7177 hello@kraus.law --- ## Cross-Border Attorney Texas & Canada | Dual-Licensed U.S./Canada Lawyer URL: https://kraus.law/cross-border/ Cross-Border Transactions One attorney. Two countries. No translation layer. I'm dual-licensed in the United States and Canada, admitted to practice on both sides of the border. For businesses operating across the 49th parallel, that means one relationship, one investment, and an attorney who doesn't need a week to get up to speed on the other jurisdiction. In this practice area The Four Frictions Two-Firm vs Dual-Qualified Evaluating Cross-Border Counsel Track Record FAQs Cross-border deals shouldn't require two law firms Most businesses that operate across the U.S.–Canada border hire one firm in each country. Two engagement letters. Two billing structures. Two teams that don't talk to each other as often as they should. And a client stuck in the middle, paying for the coordination gap. The complexity isn't the deal itself, it's the translation layer. Two securities frameworks. Two tax systems. Two governance cultures. Two sets of regulatory expectations that don't always align. Most attorneys are fluent in one side and conversational in the other. That's not enough when the transaction is real and the timeline is tight. I practice in both jurisdictions. I'm not coordinating with foreign counsel, I am the counsel, on both sides. The friction isn't theoretical. SEC continuous disclosure runs on a different cadence than Canadian Securities Administrators reporting. IFRS reporting in Canada has to be reconciled to U.S. expectations under Foreign Private Issuer rules. Material change reporting in Alberta lands at a different threshold than 8-K reporting under U.S. exchange rules. The Multijurisdictional Disclosure System, MJDS, exists to bridge these gaps for qualifying issuers, but most attorneys don't know when it applies or how to use it. The result, when you have separate counsel in each country, is a lot of well-intentioned coordination that ends up shifting the burden back to the client. The result, when you have one counsel in both, is the disclosure timeline that should have happened in the first place. Cross-border capabilities U.S. Public Listings & De-SPAC Transactions I've guided companies through the full lifecycle of going public in the United States, from F-4 registration filings to post-listing governance and continuous disclosure. I know the SEC framework from the inside, having managed these obligations as General Counsel. The F-4 versus S-4 distinction matters: Canadian-incorporated issuers register on F-4 and elect Foreign Private Issuer status, which carries a different reporting burden than domestic filers. Getting the election right at registration shapes every subsequent filing for years. Dual-Listing (TSX & NYSE/NASDAQ) For Canadian companies listing on U.S. exchanges, or U.S. companies seeking a TSX listing, I handle the governance, disclosure, and compliance requirements for both jurisdictions simultaneously. One attorney. Both sets of rules. The MJDS shelf is the underused mechanism here, it lets qualifying Canadian issuers raise capital in the U.S. on a Canadian prospectus, with significantly less duplicative review. Whether MJDS applies depends on the issuer's structure and reporting history. When it does, the savings on time and external counsel are material. Cross-Border M&A Acquisitions, mergers, asset purchases , and divestitures involving parties or assets on both sides of the border. I handle the deal structure, regulatory filings, and closing mechanics without the overhead of a dual-firm arrangement. Cross-border M&A typically triggers parallel review under the Hart-Scott-Rodino Act and the Canadian Competition Act, with different thresholds and timelines. Treaty-based withholding analysis on the deal proceeds is its own discipline. Both sit in the gap that single-jurisdiction counsel often misses. Foreign Private Issuer Compliance Canadian issuers listed on U.S. exchanges must continuously evaluate their Foreign Private Issuer status. I advise on FPI qualification, the implications of losing FPI status, and the strategic decisions that follow, including the annual June 30 measurement date that most companies don't think about until it's too late. Once FPI status is in question, the operational shift is significant, domestic filers report on 10-Q quarterly rather than 6-K material-event basis, the disclosure standard moves from MD&A to a more prescriptive U.S. framework, and Section 16 short-swing rules become applicable to insiders. I plan around the inflection rather than reacting after. Board Governance Across Jurisdictions Boards that operate across two countries face unique challenges, different fiduciary standards, different disclosure obligations, different expectations around independence and compensation. I've built governance frameworks that satisfy both Canadian and American regulators. Director independence definitions vary materially between TSX rules, NYSE rules, and Delaware-style fiduciary tests. So do disclosure expectations on related-party transactions. A board that's compliant in one regime can be exposed in the other unless the framework reconciles both. Equity Compensation Design Stock option plans, RSU programs, and performance-based equity that work across both tax systems. I design compensation structures that achieve the company's objectives without creating unintended tax consequences for employees in either country. U.S. ISO treatment under Section 422 doesn't translate to Canadian tax recognition, and Canadian deferred-compensation rules under Section 110(1)(d) don't translate cleanly to U.S. employees. Plans drafted for one jurisdiction without considering the other create bills employees only see at exercise, which is the wrong moment to find out. Cross-Border Real Estate When a Canadian resident sells U.S. real property, or a U.S. taxpayer sells Canadian property, the transaction sits at the intersection of two tax codes that don't reconcile cleanly. A Section 1031 like-kind exchange under U.S. tax law has no Canadian equivalent: U.S. deferral mechanisms don't translate to Canadian tax treatment. FIRPTA withholding applies on the U.S. side; Canadian capital-gains rules apply on the Canadian side; the treaty-based foreign tax credit analysis is its own discipline. Most cross-border real property transactions need integrated counsel before the deal structure is set, not after. I advise on the legal framework and coordinate with tax specialists on both sides. The Scale bridge: For matters requiring U.S. litigation , IP , employment , or real estate counsel, I bring in Scale LLP colleagues with expertise in those areas. The cross-border relationship stays with me. The specialized work stays inside one firm. The Four Frictions of the Two-Firm Model Most businesses that operate across the U.S.–Canada border hire one firm in each country and absorb the friction. The friction has four distinct sources, each of which adds cost and timing risk to cross-border work. Dual-qualified practice removes all four. 1 The translation layer Most attorneys are fluent in one jurisdiction and conversational in the other. That works for screening the issues, but it doesn't work for executing the transaction. Cross-border M&A, dual-listings, MJDS qualifications, and continuous disclosure each have technical details where being conversational means missing the question entirely. Dual-qualified practice brings native fluency in both, without the translation cost or the timing slip that comes from attorneys handing work back and forth. 2 The disclosure cadence mismatch SEC continuous disclosure operates on a different cadence than Canadian Securities Administrators (CSA) reporting. SEC filings (8-K, 10-Q, 10-K, proxy) follow one calendar; CSA filings (annual MD&A, AIF, interim filings) follow another. Material change reporting in Alberta lands at a different threshold than 8-K reporting under U.S. exchange rules. For dual-listed issuers, a two-firm engagement means two separate timing analyses, two drafting passes, two review cycles. The friction multiplies as disclosure pressure increases. 3 The coordination gap Two engagement letters with separate firms. Two billing structures with separate minimums. Two intake processes, two sets of conflicts checks, two teams that don't communicate as often as they should, and a client stuck in the middle paying for the coordination overhead. The friction is often invisible until a transaction needs to move fast. Then the coordination gap becomes the binding constraint on the timeline. The more recent the cross-border step, acquisition, listing, financing, the more often the gap shows up. 4 The MJDS blind spot The Multijurisdictional Disclosure System exists to bridge U.S.–Canada disclosure obligations for qualifying issuers. MJDS reduces redundant disclosure work and aligns continuous reporting between SEC and CSA frameworks, but most attorneys don't know when it applies or how to use it. For dual-listed Canadian issuers meeting MJDS eligibility, the system is a structural shortcut that requires the right counsel to recognize and implement. Without it, every step becomes manual. Two-firm model vs dual-qualified practice Across the dimensions that matter to cross-border transactions, the structural differences add up. Dual-qualified practice is usually less expensive in total spend, faster in response time, and materially easier to coordinate. Dimension Two-firm model Dual-qualified practice Engagement letters Two, one per jurisdiction One Billing structures Two minimums, two retainers, two invoice processes Single billing relationship Conflicts checks and intake Two separate processes with separate timelines Single intake, one set of conflicts Cross-border response time Variable; depends on firm-to-firm communication Same-day baseline, one attorney handles both sides MJDS expertise Often a coin flip whether either firm has it Foundational to the practice Disclosure cadence management Two firms working off two calendars One attorney managing both calendars Total cost Typically 1.3–1.7× single-firm total spend Single-firm pricing across the engagement Cost multiplier reflects observed patterns across cross-border engagements; specific cost outcomes depend on transaction complexity and firm rate structures. Not legal advice. How to evaluate cross-border counsel for a U.S.–Canada transaction A five-step framework for businesses approaching a cross-border transaction, acquisition, dual-listing, capital raise, or restructuring, and deciding whether to engage two firms or a single dual-qualified practitioner. 1 Identify the jurisdictions and where the regulatory burden is heaviest Map the transaction to the regulators involved: SEC, CSA, provincial securities commissions, stock exchanges (NYSE/NASDAQ/TSX/TSXV). Identify which side carries the more substantive disclosure or filing burden, that's where the depth of counsel matters most. 2 Assess regulatory complexity Look at the substantive regulatory overlap: SEC and CSA continuous disclosure, MJDS eligibility, securities law harmonization, tax structuring across borders, FIRPTA and treaty considerations. The more dimensions of overlap, the more value dual-qualified practice provides. 3 Evaluate timeline pressure Transactions on tight timelines amplify coordination friction. If the transaction must close in 60 days, the time spent passing work between two firms becomes a real constraint. Dual-qualified practice eliminates the hand-off and protects the timeline. 4 Weigh single-firm vs two-firm total cost The two-firm model often looks cheaper on hourly rates but adds up across separate minimums, separate retainers, and coordination time billed by both sides. Calculate total transaction cost, not just hourly rates. Dual-qualified practice is typically meaningfully cheaper when total spend is computed honestly. 5 Vet specific dual-qualification credentials Confirm active bar admission in both jurisdictions. Confirm prior transactional experience on both sides of similar deals. Confirm MJDS familiarity if relevant. Dual qualification on paper is not the same as dual qualification in practice; the credentials need real depth behind them. I've done this before I served as Outside General Counsel to Greenfire Resources through its U.S. public listing via a de-SPAC transaction with M3-Brigade Acquisition III Corp., announced December 2022, closed September 2023, valued at US$950 million, and through its subsequent TSX dual-listing in February 2024. The role wasn't advisory from the outside. It was embedded in the deal team across two countries and a fourteen-month transition. The pre-listing phase was the registration build. The Form F-4, the SEC form used when a Canadian-incorporated issuer goes public in the U.S., was filed in April 2023 (file number 333-271381) and went effective in August after multiple amendment cycles and SEC staff comments. Moving that document through the SEC's review process meant coordinating disclosure across U.S. securities law, Canadian disclosure obligations, and the company's operational reporting on Athabasca-region thermal oil production. The post-listing phase was governance design. NYSE listing standards, audit and compensation committee composition, related-party policies, insider trading procedures, the Foreign Private Issuer election and its operational implications, all built from the ground up because a private operating company doesn't carry that infrastructure into a public listing. The equity compensation plan had to function for U.S. and Canadian employees simultaneously without creating tax exposure either way. The TSX listing in February 2024 added a second jurisdiction's continuous disclosure obligations to the operating cadence. I continue to provide strategic Outside General Counsel support today. Engagements like this aren't a single transaction, they're the foundation of an ongoing relationship that lasts as long as the company's public listing does. Client Testimonial Sometimes Legal can be viewed as the 'business prevention department' — but it was the exact opposite with Chuck. He was extremely strategic, added valuable contributions across all areas of the business, and was a fantastic partner to commercial. Jennifer Warawa Former Chief Commercial Officer, DIRTT (TSX: DRT) Frequently asked questions Do I need a dual-licensed attorney? If your business has significant operations, assets, or counterparties in both the U.S. and Canada, a dual-licensed attorney eliminates the coordination gap between two firms. For a single cross-border contract, you might not need it. For an ongoing relationship, especially one involving governance , securities compliance, or M&A , it saves time, money, and risk. What is a de-SPAC transaction? A de-SPAC is a process by which a private company goes public by merging with a Special Purpose Acquisition Company (SPAC) that is already listed on a stock exchange. It's an alternative to a traditional IPO, often faster and with more pricing certainty. The regulatory requirements are substantial, SEC filings, proxy statements , governance frameworks, and I've guided companies through the full process. Can you help with Canadian securities matters if I'm based in Texas? Yes. I'm admitted to practice in Canada and I advise Canadian issuers on continuous disclosure obligations, FPI status, and cross-border governance matters. If your business has a Canadian connection, an investor, a subsidiary, a listing, or a counterparty, I can handle both sides without bringing in foreign counsel. How does billing work for cross-border matters? One engagement letter. One billing relationship. One investment. You're not paying two firms to talk to each other. For transactional work, I provide project-based estimates. For ongoing advisory work, we structure a retainer that covers both jurisdictions. How do U.S. estate tax rules affect Canadian residents holding U.S. property? The U.S. estate tax applies to the U.S.-situs property of non-resident aliens, including U.S. real estate, U.S.-incorporated company shares held directly, and certain other assets, at rates up to 40% above relatively low thresholds. The Canada–U.S. tax treaty provides a unified credit that mitigates the impact for Canadian residents, but the analysis isn't automatic and the planning windows are narrow. For Canadian residents with significant U.S. holdings, vacation property, public-company shares held directly rather than through a Canadian entity, or U.S. business interests, the planning conversation should happen long before the estate event. I work with cross-border tax specialists on the structure; my role is the legal architecture. What's the difference between Foreign Private Issuer status and domestic filer status? A Foreign Private Issuer is a non-U.S. issuer that meets specific tests under SEC Rule 405, primarily the location of the company's principal office, the residence of its officers and directors, and the percentage of its voting securities held by U.S. residents. FPIs file annual reports on Form 20-F instead of 10-K, file material event reports on Form 6-K instead of 8-K, are exempt from Section 16 short-swing rules, are exempt from proxy rules in most cases, and may report in IFRS rather than U.S. GAAP. The trade-off is real: domestic filer status carries more frequent reporting and stricter U.S. governance expectations, but it removes ambiguity for U.S. institutional investors. The June 30 annual measurement date determines which set of rules applies for the next fiscal year. Plan around the inflection. Related expertise Fractional General Counsel For ongoing Canadian-U.S. operations, fractional GC provides the continuity your business needs. Learn more Corporate Governance Cross-border companies face dual governance frameworks. I advise on both. Learn more Further reading TXSE Foreign Private Issuer Listings Rule 16.312 alternative listing pathway for foreign private issuers, four financial tests, distribution standards, home country practice accommodation, and the four scenarios where TXSE fits an FPI strategy. Read essay The SEC's Semi-Annual Reporting Proposal May 2026 proposal would allow optional semi-annual reporting via Form 10-S. The cross-border efficiency case for U.S.-Canadian, U.S.-U.K., and U.S.-EU dual-listed companies. Read essay Cross-Border US-Canada Transactions What changes when a deal touches both sides of the 49th parallel, and why two firms is the wrong default. Read essay Operating Across State Lines (Texas) Multi-state operational compliance from a Texas-based corporate counsel perspective. Read essay Raising Capital in Texas Reg D, accredited investors, and the documents that hold up under scrutiny. Read essay From the Y'all Street Law podcast Brian Elliott and I cover the developing landscape of Texas business law in long-form conversation. Episodes most relevant to this practice area: Episode 2 Equities in Dallas The Texas equity story and the development of Texas as a capital markets jurisdiction, context for any company weighing where to incorporate or list. Listen Episode 8 The Texas Stock Exchange What a new Texas-based exchange could mean for capital formation, and how it intersects with the existing NYSE/TSX dual-listing path. Listen Episode 16 2026 Predictions The 2026 cross-border outlook, IPO windows, capital flows, and where the U.S./Canada deal volume is moving. Listen Defined terms in this practice area Each term links to a statutorily-grounded definition in the Kraus Law glossary, with citations and Texas-specific application notes. going public asset purchases equity compensation proxy statements View the complete Texas Business Law Glossary → If your deal crosses the border, your attorney should too. Has your lawyer done this before? Let's have that conversation. Begin a Conversation (682) 529-7177 --- ## Employment Attorney Texas | Workplace Law & HR Counsel URL: https://kraus.law/employment/ Scale LLP Network Employment issues don't wait. An employee dispute, a compliance question, a termination decision, an executive agreement, these matters are urgent and they're personal. When employment law intersects with your business, one call to Chuck connects you with Scale LLP's employment practice. What Scale's employment practice handles Workplace Policies & Handbooks Employee handbooks, workplace policies, anti-harassment programs, and compliance frameworks that protect your business and your people. Executive Agreements Employment agreements , severance packages, non-compete and non-solicitation clauses, equity compensation, and change-of-control provisions. Employee Disputes Wrongful termination claims, discrimination allegations, wage and hour disputes, and workplace investigations. Compliance Federal and Texas employment law compliance, FLSA, FMLA, ADA, Title VII, TWC, and the Texas Payday Law. Severance & Separation Negotiation and structuring of severance agreements, separation packages, and release documentation. The team behind this practice Scale LLP's employment attorneys have practiced at major firms and in-house legal departments. They understand employment law from both sides, what it's like to advise a CEO on a termination decision, and what it's like to defend that decision in court. The practice covers the full spectrum from proactive policy work to active dispute resolution. How I connect you Employment law isn't my focus, but employment issues touch every business I work with. When an executive agreement needs drafting, a workplace dispute needs resolving, or a compliance question needs answering, I bring in a Scale employment attorney who specializes in exactly that. I stay involved because employment matters almost always intersect with corporate governance, risk management, or the transaction I'm already handling. One firm, no gaps. Where the technical work lives Employment law operates at three layers simultaneously. The federal framework, FLSA, Title VII, ADA, FMLA, OWBPA, ADEA, sets the floor. Texas-specific statutes layer on top: the Texas Labor Code, the Texas Payday Law, and the Texas Workforce Commission's regulatory enforcement. The third layer is case law, particularly Fifth Circuit and Northern District of Texas opinions, which determine how the statutes apply in practice. Where this matters operationally: Non-compete enforcement. Texas allows non-competes but only when "reasonable in time, geographic area, and scope of activity" (Tex. Bus. & Com. Code § 15.50). Two-year terms typically survive judicial review; five-year terms usually don't. The drafting choices made at signing determine what's enforceable two years later when the relationship has ended. Wage and hour exposure. FLSA exempt/non-exempt classification disputes are common, and the back-pay window in a misclassification case can extend two years (three if willful). Audit findings often trigger DOL inquiry across an entire workforce. Pre-termination posture. The window between "we've decided to terminate" and "termination conversation happens" determines the defensibility of the action. Documentation, performance management history, accommodation analysis, and the procedural rigor of the decision matter more than the rationale itself. When clients call us Four moments drive most employment engagements: Before a termination , particularly involving a protected class issue, an executive with a written contract, an employee with a complaint history, or a reduction in force. The decision posture is set before the termination, not after. At executive hire , when the offer involves equity, restrictive covenants, garden leave, severance triggers, or change-of-control protection. These provisions get litigated when the relationship ends; the drafting choices made today determine the outcome. When something surfaces , a written complaint, an EEOC charge, a DOL audit notice, a demand letter from an employee's attorney, or an internal report of harassment or discrimination. The window from "issue surfaces" to "issue is documented" is the period that determines legal posture. Periodically, for audit , handbook reviews, classification audits, FLSA compliance checks, harassment training refresh, and policy updates. Reactive audits cost more than proactive ones, every time. What engagements cost Most employment work is hourly. Rates at Scale LLP for senior employment partners typically run 30-40% below Am Law 100 rates in Dallas or Houston for comparable work, a function of the firm's distributed model and lower overhead. Some work runs project-based: handbook drafts and reviews, executive agreement packages, classification audits, and harassment-prevention training programs. Project pricing is quoted upfront when the scope allows it. Litigation work, EEOC charge response, discrimination defense, wage and hour disputes, runs hourly with budgets developed against the procedural posture of the matter. The firm does not take employment plaintiff work; defense only. There's no minimum engagement. A single advisory call about a termination decision is a legitimate engagement. Most employment problems get more expensive the longer they sit, so the math favors calling early. How this fits with the rest of the work Employment work intersects with my primary practice areas in three specific places: Cross-border M&A integration. When a U.S./Canada deal involves employee transfer, retention, or termination, the employment work has to clear both frameworks simultaneously. Two-firm coordination on this is slow; integrated counsel moves faster. Corporate governance . Boards approve executive employment terms, severance packages, equity grants, and termination decisions. The governance documentation that supports those decisions, board minutes, compensation committee resolutions, written consent, is where the legal record gets made or broken. Texas business transitions. Ownership changes, succession events, and sale processes all have employment-side considerations: key-person retention, severance for non-continuing executives, equity acceleration, and the structuring decisions around how employees experience the transition. These intersections are where the integrated model adds real value. The employment specialist handles the substance. I handle the connective tissue. Common questions When should I call about an employment issue? Before you act. The most common mistake business owners make is handling a termination, a policy change, or a dispute response without legal counsel, and then calling after the damage is done. If you're even thinking about an employment decision, call first. Can Chuck handle my employment matter directly? Employment law is a specialized field. I connect you with a Scale employment attorney who focuses on this area full-time. I stay involved as your business counsel, and I make sure the employment advice fits your broader corporate strategy. What if the issue involves an executive I hired through Chuck? That's one of the advantages of the relationship. I already know the business context, the executive's role, and the terms of the engagement. The employment attorney comes in with full context instead of starting from scratch. Do you handle employment litigation? Scale's employment practice handles both preventive work (policies, agreements, compliance) and dispute resolution (claims, investigations, litigation). I connect you with the right attorney based on what you need. Further reading from the desk. Articles and analysis I've written on topics adjacent to this practice area. Hiring & Firing Before Firing an Employee What every Texas business owner should know before terminating someone. Read · 8 min Restrictive Covenants Non-Competes in Texas What enforces and what doesn't under Texas law. Read · 10 min Investigations Workplace Investigations When the board needs to investigate a complaint, the framework matters. Read · 9 min Employment decisions have legal consequences. Call before you act. Chuck will connect you with the right employment attorney at Scale LLP. Schedule a Call (682) 529-7177 --- ## Is Your Business Ready to Sell? Exit Scorecard URL: https://kraus.law/exit-readiness-scorecard/ Exit Readiness What your business is worth today and what it will sell for are two different numbers. The gap between them is the most valuable figure in any exit — and the one owners discover too late. Closing it is the work, and it takes 12 to 18 months. Here's an honest read on where you stand. Why two businesses with the same earnings sell for different money A company clearing two million in earnings doesn't sell for twice one clearing a million. It often sells for several times more. The reason is the multiple. Scale, clean records, recurring revenue, and independence from the owner all lift the multiple a buyer will pay — not just the earnings the multiple gets applied to. That's why preparation is where the real money is made. A difference of $200,000 in your defensible earnings, at a 5× multiple, is a million dollars at closing. The same business, sold reactively the day a buyer appears versus sold after eighteen months of preparation, can carry a materially different price. The earnings barely changed. The readiness did. 1× Under $500K. Owner is the business. Sells on assets, if at all. 3× $500K–$2M. Real earnings, real gaps. Multiple starts to move. 5× $2M–$10M. Systems, not heroics. Buyers compete. 10×+ $10M+. Runs without you. Strategic buyers pay up. Illustrative. Multiples vary by industry and company. The point is the shape: value compounds as a business gets bigger, cleaner, and less dependent on its owner. Seven questions Where do you stand? Answer honestly — this is for you, not for a buyer. Nothing is stored or sent. Could the business run for 60 days without you in it? Yes No Not sure Owner dependence. If the business is you, a buyer is purchasing a job, not a company — and they discount hard for it. This is the single biggest lever on your multiple. Does any one customer make up more than 15% of revenue? Yes No Not sure Customer concentration. When one client can sink the year, a buyer prices in that risk. Diversifying the book before a sale is slow work, which is why it has to start early. Are your last three years of financials clean and on a consistent basis? Yes No Not sure Records. Due diligence is a search for reasons to lower the price. Inconsistent or informal books hand the buyer those reasons. A clean set, ideally with your own quality-of-earnings work done first, is leverage. Is all the IP — brand, software, content — owned by the company, not you personally? Yes No Not sure IP ownership. Trademarks in your personal name, code from contractors who never signed an assignment — these surface in diligence and stall deals. Fixable now, expensive later. Would your key people stay through and after a sale? Yes No Not sure Key-employee risk. If one or two people are essential and uncommitted, the buyer wants assurances — and those conversations are far easier before a sale than during one. Is a meaningful share of revenue recurring or under contract? Yes No Not sure Revenue quality. Predictable revenue earns a higher multiple than the same dollars won fresh each year. Buyers pay for what they can count on. Can your lease and key contracts transfer to a buyer without someone's veto? Yes No Not sure Assignability. A lease or contract that needs a third party's consent to transfer hands that party leverage at the worst moment. Worth checking long before close. See where you stand These seven questions are the surface. The readiness assessment I run with the owners I work with goes a great deal deeper — and turns a list of gaps into a plan with a timeline. Start a conversation — it costs you nothing Read the owner's roadmap --- ## Fintech Attorney Texas | Financial Services & Regulatory URL: https://kraus.law/fintech/ Scale LLP Network Financial technology moves fast. The legal structure underneath it can't be improvised. Regulatory frameworks, payment systems, digital assets, lending compliance, fintech operates at the intersection of technology and financial regulation. When your business needs counsel that understands both, one call to Chuck connects you with Scale LLP's fintech practice. What Scale's fintech practice handles Regulatory Compliance Federal and state financial services regulation, money transmission licensing, BSA/AML compliance, consumer lending laws, and state fintech sandboxes. Payment Systems Payment processor agreements, card network compliance, ACH and wire transfer regulations, and payment facilitator structuring. Blockchain & Digital Assets Token classification, digital asset custody, DAO structuring, smart contract review, and cryptocurrency exchange compliance. Lending Consumer and commercial lending compliance, marketplace lending platforms, bank partnership models, and true lender analysis. Financial Technology Licensing Money transmitter licensing, lending licenses, broker-dealer registration, and state-by-state regulatory mapping for financial services. The team behind this practice Scale LLP's fintech practice is led by attorneys who have served as general counsel at major fintech companies. They don't just know the regulatory framework, they've built products inside it. They understand the tension between moving fast and staying compliant, because they've lived it. Scale was founded by former tech company General Counsels, and fintech has been a core practice since the firm's inception. How I connect you Fintech isn't my practice area, but I work with business owners who are increasingly building or integrating financial technology into their operations. Payment processing, digital assets, regulatory compliance, these questions come up in corporate transactions, capital raises, and governance discussions. When they do, I bring in a Scale fintech attorney who lives in this space. I handle the corporate framework. They handle the regulatory complexity. One firm, one relationship. Where the technical work lives Fintech regulatory work spans federal frameworks, state-by-state licensing regimes, and emerging regulatory areas where the rules are still being written. The substantive practice covers: Money transmission and payments. State-by-state money transmitter licensing (nearly every state runs its own framework), the FinCEN registration requirements under the Bank Secrecy Act, payment card industry compliance, and the network rules of card brands and ACH networks. The licensing roadmap for a multi-state payments business is often longer than the product roadmap. Lending. Consumer lending licensing under state usury, finance company, and consumer credit acts. Commercial lending exemptions, marketplace lending structures, true-lender analysis, and the bank partnership models that enable fintech lending at scale. The compliance overlay is unforgiving, CFPB, OCC, FDIC, and state attorneys general all have enforcement authority. Securities-adjacent. Securities token analysis (Howey test application), Reg D and Reg A frameworks for token offerings, custody rules, and the broker-dealer registration questions that determine which activities require SEC oversight. Banking and BSA/AML. Bank Secrecy Act compliance programs, AML monitoring, OFAC sanctions screening, suspicious activity reporting, and the customer identification program (CIP) standards that apply to fintech entities through their bank partners. Blockchain and digital assets. Regulatory classification work, custody analysis, the state-by-state framework for digital asset business (BitLicense in New York, money transmitter elsewhere), and the emerging federal frameworks under recent legislation. When clients call us Fintech regulatory counsel typically gets engaged at four moments: Before launch. Regulatory classification of the product (is this a money transmitter, lender, securities offering, or banking-adjacent?), licensing roadmap development, and the compliance program design that determines whether the business is launchable in target states. Pre-launch is where the cheapest path through the regulatory framework exists. At scaling. Geographic expansion typically multiplies licensing exposure, each new state often means a new licensing analysis. The state-by-state expansion sequence (which states first, which to defer) is a strategic question with material business consequences. At capital raise. Investor due diligence on regulatory posture, disclosure of regulatory risk in offering documents, and the regulatory representations and warranties that institutional investors expect. Series A diligence often surfaces regulatory gaps that should have been closed earlier. When regulators come. CIDs, examinations, matters requiring attention from prudential regulators, state-level inquiries, and the response posture decisions that determine whether issues escalate. Cooperation strategy, scope negotiation, and remediation commitments all have long-term licensing implications. What engagements cost Fintech regulatory work is mostly hourly. The variance in scope between matters, a multi-state licensing project versus a regulatory opinion on a single product feature, makes flat pricing difficult for most work. Scale LLP's fintech and financial services partners typically price 30-40% below New York or DC Am Law fintech partner rates. The pricing differential is structurally meaningful for fintech businesses, which often face regulatory legal costs that scale faster than revenue in early years. Some work runs project-based: regulatory classification opinions, single-state license applications, BSA/AML program design, and policy and procedure development. Project pricing is quoted when scope is defined. Examinations and enforcement work runs hourly with phased budgets. Filing fees, regulatory fees, and surety bond costs (substantial for money transmitter licensing, often $50K-$1M+ per state) pass through with transparency in engagement letters. How this fits with the rest of the work Fintech regulatory work intersects with my primary practice in three specific places: Cross-border financial services. U.S./Canada cross-border payments, lending, and securities-adjacent businesses face dual regulatory frameworks (OSFI and provincial regulators in Canada; federal and state regulators in the U.S.). Dual-qualified perspective on which jurisdiction's framework drives the structuring is where significant time gets saved. Corporate governance for regulated entities. Board composition requirements for licensed entities, fit-and-proper standards, independent director requirements, and the governance documentation that satisfies regulatory examination. The governance layer for fintech is heavier than for unregulated businesses. Securities law overlap. Token offerings, Reg D and Reg A structuring, custody analysis, and the broker-dealer questions that span fintech and traditional securities practice. My corporate and securities background reads the regulatory framework from both sides. The fintech regulatory partner handles the regulatory substance. I handle the integration with corporate, governance , and cross-border . Common questions My company isn't a "fintech", do I still need fintech counsel? Possibly. If your business processes payments, offers financing, handles customer funds, or is integrating any financial technology into your product, you may have regulatory obligations you don't know about. A quick conversation with a fintech attorney can identify exposure before it becomes a problem. Does Scale handle cryptocurrency and blockchain matters? Yes. Scale's fintech practice covers digital asset classification, custody solutions, exchange compliance, DAO structuring, and token offerings. The regulatory landscape is evolving rapidly, having counsel that tracks it daily is essential. Can Chuck help me understand whether I need fintech counsel? That's one of the most common ways these conversations start. You describe what your business does with money or payments, I help determine whether there's a regulatory dimension, and if there is, I connect you with the right Scale attorney. What's the relationship between corporate counsel and fintech counsel? They're complementary. I handle entity structuring, governance, capital raises, and commercial agreements. The fintech attorney handles regulatory licensing, compliance programs, and financial services-specific requirements. Many of my clients use both simultaneously. Further reading from the desk. Articles and analysis I've written on topics adjacent to this practice area. Capital Formation Raising Capital in Texas Equity, debt, and the regulatory landscape for Texas businesses raising capital. Read · 10 min Cybersecurity Data Breach Response What to do in the first 72 hours when sensitive data is exposed. Read · 8 min Tax Strategy QSBS After OBBBA How Section 1202's tiered exclusions reshape exit planning for fintech founders. Read · 16 min Regulation doesn't wait for your product roadmap. One call to Chuck. He'll connect you with the right fintech attorney at Scale LLP. Schedule a Call (682) 529-7177 --- ## Fractional General Counsel in Texas URL: https://kraus.law/fractional-gc/ Fractional General Counsel I've built legal departments from zero, three times. Let me build yours. Your business has outgrown its formation attorney but doesn't need a $250,000-to-$500,000 full-time hire. You need a GC who has sat in the chair, knows the playbook, and shows up when it matters, without the overhead. By Chuck Kraus, Esq. · Partner at Scale LLP In this practice area The Three Tests Fractional vs Outside vs In-House Evaluating Fit How We Start FAQs The gap most growing businesses are stuck in BigLaw $1,500+ an hour for partners and nowadays $800/hr for a first-year associate. Your work gets delegated to associates you didn't hire. The partner you met at the pitch meeting bills two hours a quarter. You're a small file in a big system. or Local Generalist Good for formation docs and basic contracts. But when the deal gets sophisticated, a capital raise, a governance dispute, a cross-border transaction, the depth isn't there. You outgrew this relationship two years ago. You're stuck between two bad options. Overpay for a firm that treats you as overhead, or stay with an attorney who doesn't have the range for what your business is becoming. There's a third option. The progression most growing businesses follow looks something like this. Founder's-attorney for formation work. Outside counsel for the first major contract. A BigLaw firm when the deal complexity outruns the relationship. Fractional GC when the legal questions become persistent rather than transactional. Full-time GC at $300K+ when the business reaches the scale that justifies it. Most companies skip the fractional step. They jump from BigLaw to full-time GC, paying for two years of premium counsel before the work justifies it. Or they stay too long with outside counsel that bills hourly on situations that need governance thinking, not just legal answers. The fractional stage exists because there's a real range of business maturity, usually somewhere between $5M and $50M in revenue, depending on industry, where a company needs the GC perspective without yet needing the GC headcount. Recognizing when you're in that range, and recognizing when you've moved beyond it, is part of the engagement. If your business has outgrown fractional and needs full-time, I'll tell you. The point is to be the right fit while you need it. What a fractional GC engagement looks like When I serve as your fractional General Counsel, I become a working member of your leadership team. Not a vendor you call when something goes wrong, a strategic partner who knows your business, your contracts, your risks, and your goals. Contracts & Commercial Support Drafting, reviewing, and negotiating the agreements that drive your business, vendor contracts, customer agreements, partnership terms, licensing deals. I build contract systems that protect you without slowing you down. Board Governance & Compliance Meeting preparation, board materials, minutes, fiduciary duty guidance, and the ongoing governance infrastructure that keeps your company defensible. I've prepared board packages for publicly traded companies. I bring that discipline to every engagement. Strategic Counsel The decisions that don't have a clear legal answer, whether to take on an investor, how to structure an acquisition, when to walk away from a deal. This is where a GC earns their place. I've made these calls under pressure, at the C-suite level, for over a decade. The pattern recognition matters more than the legal research. Most strategic-counsel decisions turn on having seen the analogous situation play out before. Twenty-five years across three GC tours and dozens of board engagements is what that pattern recognition compounds into. Risk Management Business risk audits, insurance review, regulatory exposure assessment, and the proactive identification of problems before they become crises. The cheapest legal crisis is the one you prevented. Risk concentrates in the gaps between systems, the indemnification provision in a contract nobody's read against the insurance policy that's supposed to cover it; the regulatory disclosure that's accurate as written but misleading in the context of what the audit committee already knows; the compensation arrangement that's compliant in U.S. tax but creates a Canadian tax surprise. Finding those gaps is mostly experience and pattern recognition. Closing them is mostly process. Capital Raises & Structuring Equity and debt financing, entity structuring and restructuring , investor agreements, and the SEC and state securities compliance that comes with raising money. I've guided companies through capital raises on both sides of the border. Cross-Border Support For businesses with U.S.–Canada exposure, I provide dual-jurisdiction counsel without engaging two separate firms. Dual-licensed. One attorney. Both sides of the border. The Scale bridge: When you need IP counsel , a litigator , employment advice , or real estate support , I bring in a colleague from Scale LLP. You don't find another firm. You don't start over. The expertise expands. The relationship stays. A month in the engagement, in practice. Week one , standing call with leadership; review of any incoming contracts or proposals; quick triage of any urgent matters from the previous week. Mid-month , board meeting prep cycle if a board meeting is approaching: agenda, materials review, draft minutes from the prior meeting. Outside the meeting cycle: deep work on the active contracts queue. End-of-month , governance check (any filings due, any deadlines approaching, any compliance reviews scheduled), and a brief on what's coming next month. Throughout , real-time response on novel situations. The phone call when something unexpected happens is the part of the engagement that's hardest to itemize and easiest to underestimate. It's also why fractional is different from project work. The Three Tests of Fractional GC Fit A fractional GC is not part-time outside counsel. The distinction matters, and it determines whether the engagement delivers value. Three tests separate businesses that benefit from a fractional GC from businesses that would do better with traditional outside counsel. 1 The GC question A fractional GC isn't a part-time outside counsel. The distinction is real: GCs make decisions about the business, not just the legal questions. They sit in board meetings, weigh business and legal trade-offs together, and advise on direction. If what you need is legal services rendered on request, you don't need a fractional GC, outside counsel is a better fit and probably cheaper. If what you need is GC-grade judgment available consistently for governance, contracts, board support, and strategic decisions, that's where fractional fits. 2 The cadence question Fractional GC engagements work when the legal work has rhythm: board meetings quarterly, contracts cycling through monthly, governance decisions accumulating steadily, and the company at a stage where these rhythms call for ongoing legal judgment. If your legal work is genuinely one-off, annual contract review, a single transaction, occasional dispute, fractional doesn't fit. You'd be paying for cadence you don't need. The right fractional engagement matches the actual rhythm of the legal work. 3 The trust question Fractional GC fit requires the business to grant real authority within defined scope. The GC needs to make decisions, sign documents, manage external counsel, and represent the company without checking back on every choice. Without that authority, the engagement reduces to expensive outside counsel and the GC value disappears. The business needs to be ready to define the scope, document the authority, and let the GC operate inside it. Some businesses aren't ready, that's a fit issue, not a counsel issue. Fractional GC vs outside counsel vs full-time in-house The three models solve different problems at different price points. The right model depends on the business's stage, the actual cadence of legal work, and the depth of judgment the business needs available. Dimension Outside counsel Fractional GC Monthly cost range Variable, billed hourly, depends on usage Fixed retainer, typically $5K–$25K/month Depth of business knowledge Episode-by-episode; rebuilt each engagement Cumulative; deepens over time Availability Subject to firm scheduling and other matters Defined hours and response windows Decision-making authority Advisory only; client always decides Granted authority within defined scope Scope Engagement-specific; defined by matter Ongoing GC function across the business Board engagement By invitation, on specific matters Standing role in board cadence Best for Specific transactions, disputes, one-off needs Recurring governance, contracts, board support Pricing and structure vary by engagement. Full-time in-house GC roles typically run $250K–$500K all-in for mid-market companies, relevant context when comparing total cost. Not legal advice. How to evaluate whether your company needs a fractional GC A five-step framework for businesses considering a fractional GC engagement. The goal is honest assessment, not a sales pitch. If fractional doesn't fit, the right answer is to stay with outside counsel. 1 Inventory current legal spend across all sources Pull twelve months of legal spend: outside counsel invoices, consultants, in-house if any, contract review services. Categorize by type (transactional, contract, governance, compliance, employment, IP, disputes). The pattern in the categorization tells you whether the work has the cadence that fits fractional. 2 Identify recurring decisions needing legal input Look at the next quarter ahead. List the decisions the business will make where legal input would improve the outcome: contract approvals, board decisions, employment matters, governance changes, regulatory positioning. If the list is short and one-off, fractional may not fit. If the list is long and recurring, it probably does. 3 Assess board and governance maturity Do you have regular board meetings? An audit committee or equivalent? Documented related-party transaction protocols? The more developed the governance structure, the more value a fractional GC provides, and the more substantive the role they play. 4 Define the scope of authority you're willing to grant Specifically: signature authority on what categories of agreements, retention of external counsel for what kinds of matters, board reporting cadence, representation of the company in specific contexts. The clearer the scope, the better the engagement works. Vague scope produces friction on both sides. 5 Calibrate expectations on hours, access, and reporting Standard fractional engagements run 10–40 hours per month with defined response windows and recurring meeting cadence. Calibrate the structure to actual need. The engagement should feel like "we have a GC", not "we have an attorney we call sometimes." You're not getting a lawyer playing GC. You're getting a GC who chose to practice law. Three public-company GC tours in roughly fifteen years. Two were Calgary-based dual-listed energy companies in the upstream oil and gas sector, NYSE and TSX, F-1/F-4 registrations, MD&A under both jurisdictions, the full continuous-disclosure machine. The third was DIRTT Environmental Solutions (TSX: DRT) , a technology-driven prefabricated construction firm where I served as Senior Vice President, General Counsel and Corporate Secretary through the operational reset of the COVID-19 pandemic, restructuring distribution contracts, leading multi-million-dollar commercial litigation to summary judgment, and advising the board through CEO transition. Today I serve as Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR), a public oil sands company. Each tour shaped a different muscle. Energy sector taught me regulatory rhythm. DIRTT taught me crisis legal management at speed. Greenfire is teaching me the ongoing discipline of cross-border continuous disclosure post-listing. Fractional engagements draw on all of them simultaneously. I've built legal departments from the ground up. Not inherited a team. Not stepped into an existing structure. Started with nothing and built the contracts, the compliance systems, the board governance framework, and the team to run it, three times. I've managed 30+ people across three departments. The GC role isn't just legal. It's management, politics, budget, and judgment under pressure. When I advise your company, I'm drawing on a decade of operating at the executive level, not extrapolating from outside practice. I've navigated public company disclosure obligations . SEC filings, continuous disclosure, material event reporting, insider trading policies. If your company is public or considering a listing, I've been in the chair that manages those obligations. I've operated across two countries. Dual-licensed in the U.S. and Canada. I've managed governance frameworks that satisfy both Canadian securities regulators and the SEC simultaneously. If your business has cross-border exposure, you won't find many fractional GCs with this depth. I didn't leave the GC chair because I couldn't handle it. I left because I wanted to bring that experience to more companies, particularly the ones outside major metros that deserve the same caliber of counsel but don't have access to it. Client Testimonial Chuck Kraus brings a lifetime of wise counsel, built in some of the most challenging business arenas in the world, to every relationship with a small town charm. You don't have to go to Dallas or a big city for the best — but you're getting it in humility and grace. Mike Williams Google Review · ★★★★★ How we start 1 A 15-minute call. We talk about your business, what you're working on, where the friction is, and what kind of legal support would matter. 2 A scoping conversation. If there's a fit, we go deeper. I learn your contracts, your governance structure, your regulatory landscape, and your growth plans. By the end of this conversation, we'll both know what the engagement looks like. 3 A clear engagement letter. Monthly retainer, defined scope, predictable investment. You know exactly what the engagement looks like before it begins. No surprise invoices. No scope creep without a conversation first. Frequently asked questions How is this different from hiring a law firm on retainer? A traditional retainer buys you access to a firm. Fractional GC buys you a relationship with one attorney who knows your business as deeply as a full-time hire would. I'm not waiting for you to call with a problem, I'm proactively identifying issues, attending key meetings, and staying current on your business between calls. What size company needs a fractional GC? Typically, companies doing $2M–$50M in revenue that have recurring legal needs but aren't ready to hire a full-time general counsel at $250,000–$400,000 per year. If you're signing contracts regularly, managing employees, navigating regulatory requirements, or planning a significant transaction, you're probably ready. How much time do you spend with each client? It varies by need. Some clients need 5–10 hours per month. Others need 20+. We scope it during our initial conversations and adjust as the business evolves. The retainer structure means you're not penalized for picking up the phone. Can you work with my existing attorneys? Absolutely. Many of my clients have a local attorney for real estate or estate planning and use me for corporate, governance, and transactional work. I coordinate rather than compete. And through Scale LLP, I can supplement with specialists in IP, litigation, employment, and more. What happens if I need to scale up quickly? That's the advantage of the Scale LLP platform. If your business enters a period of intense legal activity, an acquisition, a capital raise, litigation, I bring in additional Scale attorneys to handle the volume. You don't have to find a new firm during a crisis. How is fractional GC different from a fractional CFO or fractional CMO? Fractional executive roles share a basic shape, senior expertise applied at less than full-time scope, but the work differs by function. A fractional CFO manages financial systems, reporting, and controls. A fractional CMO manages positioning, demand generation, and brand. A fractional GC manages legal judgment as it intersects with business strategy: contracts, governance, risk allocation, regulatory exposure, and the calls that don't have a clear right answer. The common thread is judgment under uncertainty. The difference is which set of frameworks you're applying. Related expertise Corporate Governance Most fractional GC clients also need board advisory and fiduciary oversight. Learn more Cross-Border Transactions For companies with Canadian operations, dual-licensing means one attorney covers both sides. Learn more Further reading What a Fractional GC Does The honest version, scope, cadence, and the difference between a GC and a contract review service. Read essay The Board Meeting Nobody Prepared For Practical governance for private companies, written for the board chair who has fifteen minutes to read. Read essay The CEO's Guide to Getting Sued What happens in the first 30 days, and what your GC should already have ready. Read essay From the Y'all Street Law podcast Brian Elliott and I cover the developing landscape of Texas business law in long-form conversation. Episodes most relevant to this practice area: Episode 14 Law Firm of the Future How distributed firms and fractional engagement models are reshaping legal service delivery, and what that means for mid-market companies. Listen Episode 10 Future of Law Rapid Fire Quick takes on AI, distributed practice, and how legal work for growing companies is changing. Listen Episode 16 2026 Predictions Where outside general counsel work is heading, and what mid-market companies should expect in the next year. Listen Defined terms in this practice area Each term links to a statutorily-grounded definition in the Kraus Law glossary, with citations and Texas-specific application notes. fiduciary duty entity structuring restructuring disclosure obligations View the complete Texas Business Law Glossary → Let's talk about what a fractional GC engagement could look like for you. If the answer isn't a confident yes, let's have a conversation about what a real GC relationship looks like. Begin a Conversation (682) 529-7177 --- ## Texas Business Law Glossary URL: https://kraus.law/glossary/ A Working Reference Texas Business Law Glossary A reference for attorneys, law students, and legal researchers working in Texas business and corporate law. Statutory citations to the Texas Business Organizations Code, Texas Government Code, and supporting case law, with current statutory amendments through 2026. 260 Entries 300+ Statutory Sections 60+ Cases Cited May 2026 Last Revised Methodology Each entry begins with a definition in plain English, followed by primary statutory and case-law authority, the operative rules and exceptions, and where appropriate, practical context drawn from how Texas business lawyers work with the doctrine. Citations follow standard Texas legal citation format. Entries marked 2025 reflect statutory or doctrinal changes from the 2024–2026 legislative cluster, including House Bill 19 creating the Texas Business Court (effective September 1, 2024), Senate Bill 29 codifying the business judgment rule (effective May 14, 2025), and House Bill 40 expanding Business Court jurisdiction (effective September 1, 2025). The corpus is a working reference, not legal advice. It is maintained by Kraus Law and revised as Texas business law evolves. ⌘K Expand All · Collapse All A B C D E F G H I J K L M N O P Q R S T U V W X Y Z A Acceleration Clause § A provision in a promissory note, deed of trust, or credit agreement that allows the lender, upon the occurrence of a specified event of default, to declare the entire outstanding balance immediately due and payable. In Texas, acceleration of a real-property-secured loan generally requires both notice of intent to accelerate and notice of acceleration, and is subject to a four-year statute of limitations on subsequent enforcement. An acceleration clause is a provision in a promissory note, deed of trust, or credit agreement that allows the lender, upon the occurrence of a specified event of default, to declare the entire outstanding loan balance immediately due and payable, bypassing the original installment schedule. Without an acceleration clause, a lender's only remedy for a missed installment would be to sue for that installment as it comes due, an inefficient mechanism that effectively forces the lender to wait through maturity. Acceleration is the gateway to most lender remedies, including foreclosure on collateral. Authority General Texas contract law. Notice requirements for acceleration of real-property-secured loans: Tex. Prop. Code § 51.002(d) (20-day notice of default and intent to accelerate before notice of sale on residential homestead); deed-of-trust contractual notice provisions. Statute of limitations for foreclosure: Tex. Civ. Prac. & Rem. Code § 16.035 (four years from accrual; loan with acceleration accrues at acceleration). Notice of intent to accelerate doctrine: Holy Cross Church of God in Christ v. Wolf , 44 S.W.3d 562 (Tex. 2001) (notice of intent to accelerate and notice of acceleration are separate, both required absent waiver). Two-step Texas notice rule Texas common law has long required two separate notices to accelerate a debt secured by real property: (1) notice of intent to accelerate , informing the borrower that default exists and that acceleration will occur if the default is not cured by a specified date; and (2) notice of acceleration , declaring that acceleration has occurred and the entire balance is due. Holy Cross Church of God in Christ v. Wolf (Tex. 2001) confirmed that both notices are independently required absent express contractual waiver. Most modern deeds of trust include language addressing the two-step requirement either by waiver or by specification of the notice mechanism. Statutory residential notice For residential real property used as the borrower's principal residence, Section 51.002(d) of the Property Code adds a statutory 20-day cure period: the mortgage servicer must serve a notice of default with at least 20 days to cure before serving a notice of sale. The 20-day notice requirement is non-waivable for residential homestead foreclosures and operates in addition to the contractual notice-of-intent-to-accelerate requirement. Federal Real Estate Settlement Procedures Act (RESPA) regulations may add further pre-foreclosure obligations on residential mortgage servicers. Statute of limitations interaction Section 16.035 imposes a four-year statute of limitations on foreclosure of a real property lien. Where a loan has an acceleration clause, the limitations period generally begins running on the date of acceleration (rather than the original maturity date). This creates a practical trap: an acceleration triggered too early, before the lender is ready to enforce, can start the clock prematurely and result in a barred claim. Lenders typically include "rescission of acceleration" provisions in deeds of trust permitting the lender to abandon a prior acceleration, restarting the limitations clock. Events triggering acceleration Standard acceleration triggers include: (1) failure to pay principal or interest when due; (2) breach of any covenant after notice and cure period; (3) bankruptcy or insolvency of borrower or guarantor; (4) material misrepresentation in loan documents; (5) sale or transfer of collateral without consent ("due-on-sale" clauses); (6) cross-default on other indebtedness; (7) death or dissolution of guarantor; (8) material adverse change in financial condition. Each trigger should be carefully calibrated in the credit agreement, overly broad triggers create surprise defaults and litigation risk. Rescission and reinstatement An acceleration may be rescinded by mutual agreement of the parties or, in some cases, by unilateral lender action under specific contractual rescission rights. Many deeds of trust grant the borrower a right to reinstate after acceleration but before foreclosure sale by paying all delinquent amounts plus costs. Rescission and reinstatement both restore the loan to its pre-acceleration installment schedule and reset the limitations clock. Practical context For Texas lenders, acceleration is a powerful but procedurally exacting remedy. Best practice: (1) confirm contractual notice requirements and serve all required notices in proper form; (2) confirm any statutory notice requirements (residential 20-day notice); (3) document delivery of notices via certified mail with retained receipts; (4) calendar the 4-year limitations period from acceleration date; (5) consider rescission of acceleration if circumstances change before enforcement. For Texas borrowers facing acceleration, the most common defenses involve insufficient notice, improper notice content, or lender estoppel from prior conduct (accepting late payments without insisting on strict performance). Related Terms Promissory Note · Deed of Trust · Default · Guaranty Agreement · Nonjudicial Foreclosure Accredited Investor § An investor meeting specific SEC criteria permitting purchase of unregistered securities under Regulation D. Individuals qualify by (i) net worth >$1M (excluding primary residence), (ii) income >$200K (or $300K with spouse) for last two years with reasonable expectation to continue, or (iii) holding specified professional certifications (Series 7, 65, 82). Entities qualify if they meet specific asset, ownership, or status thresholds. Defined in 17 C.F.R. § 230.501(a). An accredited investor is an investor meeting specific SEC criteria permitting purchase of unregistered securities under Regulation D. The accredited investor concept is foundational to U.S. private capital raising, most private offerings are limited to accredited investors to qualify for Regulation D exemptions from registration. Individuals qualify by income, net worth, or specified professional certifications; entities qualify by asset thresholds, ownership composition, or specific regulated-entity status. Authority SEC regulation: 17 C.F.R. § 230.501(a) (definition of accredited investor under Regulation D). Statutory basis: 15 U.S.C. § 77b(a)(15) (Securities Act of 1933 § 2(a)(15)). 2020 expansion: SEC Release No. 33-10824 (added knowledgeable employee, professional certification, and family office categories). Texas state-law parallel: Tex. Gov't Code § 4005.024 . Individual qualification, financial criteria Individual investors qualify under Rule 501(a) by meeting any of: (1) net worth test , net worth (alone or with spouse) exceeds $1,000,000, excluding primary residence; (2) income test , individual income exceeds $200,000 in each of the two most recent years (or $300,000 joint with spouse), with reasonable expectation of reaching the same level in the current year. Net worth excludes primary residence value but includes all other assets minus liabilities; mortgage debt up to fair value of residence is excluded from liabilities. Individual qualification, professional certification (2020 expansion) The 2020 SEC expansion added accredited investor status for individuals holding specified professional certifications: (1) Series 7 (general securities representative); (2) Series 65 (uniform investment adviser); (3) Series 82 (private securities offerings representative). The certification must be in good standing. The expansion recognizes financial sophistication independent of net worth or income. Entity qualification Entities qualify under Rule 501(a) by meeting various criteria: (1) specific regulated entities , banks, insurance companies, broker-dealers, registered investment companies, BDCs, SBICs; (2) employee benefit plans with $5M+ assets; (3) charitable organizations, corporations, partnerships, LLCs with $5M+ total assets; (4) directors, executive officers, general partners of the issuer; (5) entities owned entirely by accredited investors ; (6) family offices (with $5M+ AUM, certain governance), added 2020; (7) knowledgeable employees of private funds, added 2020; (8) investment advisers registered with SEC or state , added 2020. Verification requirements Reasonable steps to verify accredited investor status are required for Rule 506(c) offerings (general solicitation permitted). Standard verification methods: (1) income verification , reviewing IRS forms (W-2, 1099, K-1, 1040) for last two years; (2) net worth verification , recent third-party documentation of assets and liabilities; (3) third-party verification , written confirmation from registered broker-dealer, investment adviser, attorney, or CPA; (4) self-certification , sufficient for Rule 506(b) but not 506(c). Many issuers use third-party verification services. Why accredited investor status matters Accredited investor status enables: (1) Regulation D Rule 506 offerings , most common private placement framework; (2) fewer disclosure requirements in Rule 506(b) offerings; (3) access to private funds ; (4) private startup investments ; (5) secondary private market participation . Non-accredited investors face substantially more limited private-market access. Practical context For Texas issuers raising private capital, accredited investor status is the gating concept. Best practice: (1) for Rule 506(b), can include up to 35 non-accredited investors but disclosure burdens increase substantially, most issuers limit to accredited only; (2) for Rule 506(c) general solicitation, all purchasers must be verified accredited; (3) maintain documentation of verification; (4) coordinate with subscription agreement representations; (5) update verification at re-investment or new offering. For investors: (1) understand qualification criteria and documentation requirements; (2) recognize that self-certification alone does not satisfy 506(c); (3) for entity investors, evaluate qualification under entity-specific rules; (4) consider professional certification path for individuals with sophistication but below financial thresholds. Related Terms Regulation D · Private Placement Memorandum · Texas Securities Act · Form D · SAFE Action by Written Consent § A procedure by which shareholders or directors take formal corporate action without holding a meeting, by signing a written consent that specifies the action taken. The consent has the same effect as a vote at a duly-called meeting. Action by written consent is a procedure by which shareholders or directors take formal corporate action without holding a meeting, by signing a written consent that specifies the action taken. The consent has the same effect as a vote at a duly-called meeting. Authority Tex. Bus. Orgs. Code § 6.201 (general); § 6.202 (in lieu of meeting); § 6.252 (electronic signatures); § 21.356 (record date for written consent); § 21.416 (board action by written consent). Default rule for shareholders Under § 6.202 , an action that may be taken at a shareholder meeting may be taken without a meeting if a written consent signed by the holders of all shares entitled to vote on the action sets forth the action. The default is unanimous written consent. Less-than-unanimous consent Under § 21.456 and § 6.202(c) , the certificate of formation may permit shareholder action by written consent of holders of the minimum number of shares that would be required to approve the action at a meeting at which all shareholders entitled to vote were present (typically a majority for ordinary matters, two-thirds for fundamental actions). Director consent Under § 21.416 , the board of directors may take any action by unanimous written consent of all directors, unless the certificate or bylaws provide otherwise. The Texas default for directors is unanimous written consent, Texas does not allow "majority" written consents at the board level absent express authorization in the governing documents. Practical context Closely-held corporations routinely operate by written consent rather than formal meetings. The unanimous-consent default for shareholders is often modified by the certificate of formation to permit majority written consents, without that modification, a single dissenting shareholder can force any action to a formal meeting. Related Terms Annual Meeting · Special Meeting · Voting · Shareholder · Director Additional Insured § A party, typically not the named insured, who is added to a liability insurance policy by endorsement and entitled to coverage for liability arising from the named insured's operations or specified activities. Common in construction, real estate, vendor-vendee, and landlord-tenant relationships. Standard ISO endorsements (CG 20 10, CG 20 26, CG 20 33, CG 20 37) define scope. Coverage typically extends only to liability "caused, in whole or in part, by" the named insured's acts or omissions, not the additional insured's independent negligence. An additional insured is a party, typically not the named insured, who is added to a liability insurance policy by endorsement and entitled to coverage for liability arising from the named insured's operations or specified activities. Additional insured status is common in commercial relationships where one party (the contractor, vendor, tenant, etc.) carries primary insurance and the other party (the owner, customer, landlord) wants protection for liability arising from the first party's operations. Standard ISO endorsement forms define the scope and limits of additional insured coverage. Authority Standard ISO endorsement forms governing additional insured coverage: CG 20 10 (additional insured-owners, lessees, or contractors-scheduled person or organization); CG 20 26 (additional insured-designated person or organization); CG 20 33 (additional insured-owners, lessees, or contractors-automatic status); CG 20 37 (additional insured-completed operations). Texas case law on scope: Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc. , 256 S.W.3d 660 (Tex. 2008); In re Deepwater Horizon , 470 S.W.3d 452 (Tex. 2015); ExxonMobil Corp. v. Electric Reliability Council of Texas , 632 S.W.3d 561 (Tex. 2021). Texas Insurance Code parallels: Tex. Ins. Code Ch. 151 (Texas Construction Anti-Indemnity Act exceptions for additional insured arrangements). Why parties want additional insured status The principal reasons a party seeks additional insured status under another's policy: (1) direct insurance protection , separate from contractual indemnification, the additional insured can claim coverage directly under the policy if sued; (2) access to defense costs , the policy typically funds defense without requiring proof of the named insured's liability; (3) independent right against insurer , additional insured status creates rights independent of the named insured, so disputes between insured and insurer don't necessarily defeat coverage; (4) protection against indemnitor insolvency , if the indemnifying party (named insured) becomes insolvent, the insurance is still available; (5) Anti-Indemnity Act workaround , in construction, additional insured arrangements survive certain TCAIA limits that void direct indemnification. Scope under modern endorsements, the "caused by" limitation The 2004 and later ISO endorsements significantly narrowed additional insured coverage. Modern forms (CG 20 10 (04 13), CG 20 26 (04 13)) typically extend coverage only to liability "caused, in whole or in part, by" the acts or omissions of the named insured or those acting on its behalf. This phrasing limits coverage to liability arising from the named insured's conduct, not the additional insured's independent negligence. Older endorsements (CG 20 10 (10 93)) used broader "arising out of" language extending to liability merely connected with the named insured's operations regardless of fault. Practitioners should identify the specific endorsement edition; older endorsements provide substantially broader coverage. Texas Supreme Court guidance Evanston Insurance Co. v. ATOFINA Petrochemicals (Tex. 2008) addressed scope of "arising out of" coverage under older ISO endorsement forms, coverage extends to liability with even an attenuated causal connection to the named insured's operations. In re Deepwater Horizon (Tex. 2015) addressed additional insured rights in the context of complex indemnification structures, holding that contract terms can limit insurance coverage where the underlying contract specifies the scope of indemnity. ExxonMobil v. ERCOT (Tex. 2021) clarified the relationship between additional insured endorsements and underlying contractual indemnification, extrinsic-evidence limits and the four-corners rule for coverage analysis. Construction industry, TCAIA interaction The Texas Construction Anti-Indemnity Act (Chapter 151 of the Insurance Code) generally voids construction contract provisions requiring indemnification of an indemnitee for the indemnitee's own negligence. However, the TCAIA contains a narrow exception preserving additional insured coverage in OCIPs (owner-controlled insurance programs) and certain wrap-up insurance arrangements. The interaction is technical: contractual indemnification may be voided while parallel additional insured coverage survives. See Texas Construction Anti-Indemnity Act . Common structural arrangements Typical additional insured contexts: (1) construction contracts , owner is added insured on contractor's CGL; subcontractors add general contractor; (2) commercial leases , landlord is added insured on tenant's CGL covering tenant's operations; (3) vendor agreements , manufacturer adds distributor; product seller adds product manufacturer; (4) professional service contracts , client adds consultant on consultant's E&O policy; (5) event and venue contracts , venue is added insured on event organizer's policy; (6) licensing arrangements , licensor is added insured on licensee's policy. Insurance certificates vs. endorsements A certificate of insurance is informational only, it does not create coverage. Additional insured status is created by an actual endorsement to the policy, not by the certificate. Common contract drafting practice requires both: (1) the underlying policy must contain the additional insured endorsement; (2) the certificate must evidence that endorsement. Failure to obtain the endorsement (despite a certificate showing additional insured status) leaves the purported additional insured without coverage. Best practice: request copies of the actual endorsement, not just the certificate, for material contracts. Primary vs. excess Additional insured coverage is typically negotiated as either primary (responding before the additional insured's own insurance) or excess (responding only after the additional insured's own insurance is exhausted). Standard endorsements default to "other insurance" provisions that may make the additional insured's coverage primary or excess depending on the relationship. Sophisticated contracts specify primary status with a "primary and noncontributory" endorsement (e.g., CG 20 01) ensuring the named insured's policy responds first without contribution from the additional insured's own coverage. Practical context For Texas commercial parties, additional insured status is often more valuable than contractual indemnification, particularly when the indemnitor is a small contractor or vendor who could be insolvent. Best practice: (1) require additional insured status, primary and noncontributory, with waiver of subrogation, in all material commercial contracts; (2) require the actual endorsement (not just certificate) before contract execution; (3) specify the endorsement form number when possible (older "arising out of" forms provide broader coverage); (4) for construction, layer additional insured with TCAIA-compliant indemnification; (5) require ongoing-operations AND completed-operations endorsements for construction (CG 20 10 + CG 20 37); (6) renew endorsement requirements annually with each policy renewal. Common drafting failure: requiring "additional insured" without specifying the form, scope, primary status, or waiver of subrogation, leaving meaningful ambiguity about what the insurance provides. Related Terms Commercial General Liability Insurance · Subrogation · Indemnification (Contractual) · Texas Construction Anti-Indemnity Act · Hold-Harmless Clause Affidavit of Completion § 2022 A sworn instrument recorded by the owner of a Texas construction project stating the date the original contractor completed the work. Historically used to shorten the lien-filing window, the affidavit's power to truncate lien deadlines was eliminated by HB 2237 (effective January 1, 2022) for prime contracts entered after that date. An affidavit of completion is a sworn instrument recorded by the owner of a Texas construction project, stating the date on which the original contractor completed the work. Under prior versions of Chapter 53 of the Property Code, the recording of a timely affidavit of completion (with required notice to the original contractor and subcontractors) could shorten the lien-affidavit deadline to 40 days after the recorded completion date. House Bill 2237 (effective January 1, 2022) eliminated that truncation effect for original contracts entered into on or after that date. Authority Texas mechanic's lien statute: Tex. Prop. Code Ch. 53 . Affidavit of completion: § 53.106 . Notice relating to termination or abandonment by original contractor or owner: § 53.107 . Lien-affidavit filing deadlines (now controlling under all circumstances): § 53.052 . Statutory amendments: HB 2237, 87th Leg. (2021), effective Jan. 1, 2022, applicable to original contracts entered into on or after that date. Pre-2022 mechanics Before January 1, 2022, an owner who recorded an affidavit of completion under § 53.106, meeting all statutory content and service requirements, including delivery to all subcontractors with timely notice claims, could limit the period during which lien claimants could file lien affidavits to 40 days after the date of completion stated in the affidavit. The truncation was an important risk-shifting tool for owners and lenders preparing to release retainage and close out a project. Current (post-HB 2237) mechanics For original contracts entered on or after January 1, 2022, the affidavit of completion no longer shortens the lien-filing deadline. The deadlines under § 53.052 control regardless of any owner-recorded completion affidavit. The owner may still record an affidavit to evidence the date of completion for other purposes (commencement of statute-of-repose periods, retainage release timing under § 53.101, foreclosure-suit limitations under § 53.158), but the 40-day acceleration mechanism is gone. Statutory content requirements Under § 53.106, the affidavit must (1) be signed by the owner; (2) identify the property by legal description; (3) identify the original contractor; (4) state the date of completion; and (5) be filed with the county clerk in the county where the property is located. Notice requirements differ for residential and non-residential projects. Defective affidavits, incomplete service, deficient content, untimely recording, are routinely challenged in litigation. Practical consequences The HB 2237 amendments removed an important close-out planning tool. Owners and lenders on contracts post-dating January 1, 2022 must now wait through the full statutory deadline window (15th day of the 4th month after completion for non-residential original contractors; 15th of the 3rd month for residential) before they can be certain that lien rights have expired. Title insurance, retainage release, and final pay-application timing have all shifted to accommodate the longer waiting period. Practical context The affidavit of completion is an example of a Texas statutory tool whose practical utility has shifted dramatically, and not all transaction parties have adjusted their playbooks. Texas attorneys advising owners, contractors, lenders, or title insurers on construction matters should confirm the prime-contract execution date before assuming pre-2022 or post-2022 rules apply. Deals straddle both regimes and will continue to do so for several years given multi-year construction timelines. Related Terms Mechanic's and Materialman's Lien · Retainage · Construction Contract · Texas Prompt Payment Act Age Discrimination in Employment Act (ADEA) § Federal statute (29 U.S.C. §§ 621-634) prohibiting employment discrimination against individuals 40 and older. Applies to employers with 20+ employees. Covers hiring, firing, promotions, layoffs, compensation, benefits. Damages: back pay, front pay, reinstatement, liquidated (double) damages for willful violations, attorney's fees, but no compensatory or punitive damages. The Older Workers Benefit Protection Act (OWBPA) imposes specific waiver requirements for severance agreements covering ADEA claims. The Age Discrimination in Employment Act (ADEA) is a federal statute prohibiting employment discrimination against individuals 40 years of age and older. Enacted in 1967, the ADEA addresses age-based discrimination in hiring, termination, promotions, layoffs, compensation, and benefits. The statute applies to employers with 20 or more employees, narrower than Title VII's 15-employee threshold. The ADEA is one of the principal federal employment discrimination statutes alongside Title VII and the ADA, with distinctive damages structure (no compensatory or punitive; liquidated damages for willful violations) and the OWBPA waiver framework for severance agreements. Authority Federal statute: 29 U.S.C. §§ 621-634 . Coverage threshold: § 630(b) (20+ employees). Older Workers Benefit Protection Act (OWBPA): 29 U.S.C. § 626(f) . EEOC regulations: 29 C.F.R. Part 1625 . Foundational cases: Hazen Paper Co. v. Biggins , 507 U.S. 604 (1993) (disparate-treatment standard); Smith v. City of Jackson , 544 U.S. 228 (2005) (disparate-impact theory); Gross v. FBL Financial Services, Inc. , 557 U.S. 167 (2009) (but-for causation for ADEA disparate-treatment); General Dynamics Land Systems v. Cline , 540 U.S. 581 (2004) (no reverse-age claims). Texas counterpart: Tex. Lab. Code Ch. 21 (TCHRA). Coverage and protected class The ADEA protects individuals 40 and older from age-based employment discrimination. Coverage extends to: (1) private employers with 20+ employees ; (2) federal, state, and local government employers (with limitations); (3) employment agencies ; (4) labor organizations . Reverse age discrimination, discrimination against younger workers in favor of older workers, is generally not actionable ( General Dynamics v. Cline ). Texas's TCHRA provides parallel coverage at the lower 15-employee threshold, extending state-law protection to mid-market Texas employers not covered by ADEA. But-for causation, Gross v. FBL Gross v. FBL Financial Services (2009) held that ADEA disparate-treatment claims require the plaintiff to prove age was the "but-for" cause of the adverse employment action. This is a higher standard than Title VII's "motivating factor" framework, meaning ADEA plaintiffs face a more demanding causation requirement. The decision was controversial and prompted Congressional proposals to amend the statute, but the but-for standard remains controlling. Practical implication: mixed-motive cases that would survive under Title VII may fail under ADEA, where the plaintiff must show age was the determinative reason rather than just one motivating factor. OWBPA waiver requirements The Older Workers Benefit Protection Act imposes specific requirements for valid waivers of ADEA claims, typically in severance agreements and reductions in force. To validly waive ADEA claims, the waiver must: (1) be in writing and understandable ; (2) specifically refer to ADEA claims ; (3) not waive future claims ; (4) provide consideration beyond what employee is already entitled to receive ; (5) advise employee in writing to consult attorney ; (6) give employee at least 21 days to consider (45 days for group programs); (7) provide 7-day revocation period after signing . In group reductions, employer must provide specific information about the program (job titles and ages of selected and not-selected employees in the decisional unit). Failure to satisfy OWBPA voids the waiver as to ADEA claims, even if the broader release is otherwise valid. Damages and remedies ADEA damages are distinctive: (1) back pay , lost wages from termination through judgment; (2) front pay , anticipated future lost wages where reinstatement is impractical; (3) reinstatement ; (4) liquidated damages equal to back pay for willful violations (effectively doubling back pay); (5) attorney's fees and costs . ADEA does not provide compensatory damages for emotional distress or punitive damages, distinguishing it from Title VII (which provides both subject to caps). The damages structure makes economic damages (back pay, front pay, liquidated) the principal recovery. The unlimited liquidated damages can produce substantial awards in willful-violation cases. Common factual patterns Recurring ADEA scenarios: (1) reductions in force , selecting older workers disproportionately; (2) replacement with younger workers , terminating older workers and hiring younger replacements; (3) promotion denials , passing over older workers; (4) age-based comments , "old guard," "fresh blood," "energy" comments creating evidence of intent; (5) compulsory retirement , generally prohibited except for specific BFOQs and certain executive positions; (6) "overqualified" framing of older candidates; (7) benefits cuts targeting older workers' benefits. Practical context For Texas employers, ADEA exposure is substantial, particularly in reductions in force, which routinely generate ADEA claims. Best practice: (1) document business reasons for adverse employment actions independent of age; (2) for RIFs, conduct adverse-impact analysis on age before final selections; (3) for severance agreements with employees 40+, comply rigorously with OWBPA (specific language, 21/45-day consideration, 7-day revocation, decisional unit information); (4) train managers on age-related comments, "stuck in their ways," "energy needs," "old school" all create evidence of intent; (5) maintain neutral retirement and benefit structures; (6) coordinate ADEA with TCHRA (Texas state-law parallel). For employees: (1) recognize that severance with OWBPA-deficient waiver does not bar ADEA claims; (2) preserve evidence of age-related comments and patterns; (3) calendar 300-day EEOC charge deadline. Common pitfall: employers using template severance agreements that satisfy general waiver requirements but fail OWBPA, leaving ADEA claims preserved despite signed releases. Companion article: Before Firing an Employee Related Terms Title VII · Texas Commission on Human Rights Act · EEOC Charge · Severance Agreement · Wrongful Termination Americans with Disabilities Act (ADA) § Federal statute (42 U.S.C. § 12101 et seq.) prohibiting discrimination against qualified individuals with disabilities. Title I covers employment, applies to employers with 15+ employees. Requires reasonable accommodation of qualified individuals' disabilities unless undue hardship. The ADA Amendments Act of 2008 substantially broadened the disability definition. Interactive-process requirement is central, failure to engage in good-faith dialogue independently supports liability. The Americans with Disabilities Act (ADA) is a comprehensive federal civil rights statute prohibiting discrimination against qualified individuals with disabilities. The ADA covers employment (Title I), state and local government (Title II), public accommodations (Title III), telecommunications (Title IV), and miscellaneous provisions (Title V). For commercial employers, Title I, employment, is the principal concern. The ADA Amendments Act of 2008 (ADAAA) substantially broadened the definition of disability, reversing earlier Supreme Court decisions that had narrowed coverage. Authority Federal statute: 42 U.S.C. § 12101 et seq. Title I (employment): 42 U.S.C. §§ 12111-12117 . ADA Amendments Act of 2008: Pub. L. No. 110-325. EEOC regulations: 29 C.F.R. Part 1630 . Coverage threshold: 15 or more employees. Foundational cases: U.S. Airways v. Barnett , 535 U.S. 391 (2002) (reasonable accommodation); Toyota Motor Mfg. v. Williams , 534 U.S. 184 (2002) (largely superseded by ADAAA); EEOC v. Schneider National , 481 F.3d 507 (7th Cir. 2007). Texas counterpart: Tex. Lab. Code Ch. 21 . "Disability" under the ADAAA The ADA defines disability as: (1) a physical or mental impairment that substantially limits one or more major life activities; (2) a record of such impairment; (3) being regarded as having such impairment. The ADAAA (2008) substantially broadened "disability" by: (1) requiring courts to construe "disability" broadly in favor of coverage; (2) overruling cases that excluded conditions controllable by mitigating measures (medication, prosthetics); (3) clarifying that "regarded as" claims do not require limitation of major life activity; (4) listing major life activities expansively (caring for self, walking, hearing, seeing, learning, concentrating, working, etc.). Post-ADAAA, the threshold disability question is rarely the principal issue; the focus has shifted to reasonable accommodation and qualified-individual analysis. Qualified individual ADA protection requires the individual to be "qualified", meaning the individual: (1) satisfies the requisite skill, experience, education, and other job-related requirements ; (2) can perform the essential functions of the position with or without reasonable accommodation . "Essential functions", those fundamental to the position, not merely marginal, are determined by employer's judgment, written job description, time spent on functions, consequences of not requiring performance, work experience of past incumbents. Distinguishing essential from marginal functions is critical to ADA analysis; reasonable accommodations need only enable performance of essential functions. Reasonable accommodation The ADA requires employers to make "reasonable accommodation" of qualified individuals' disabilities unless doing so would impose "undue hardship." Common accommodations: (1) job restructuring , modifying non-essential duties; (2) modified work schedules , flexible hours, part-time, telework; (3) physical modifications , accessible workspace, assistive equipment; (4) reassignment to vacant position; (5) leave for medical treatment or recovery; (6) auxiliary aids and services , interpreters, readers, assistive technology. The accommodation must be "reasonable" but not necessarily the employee's first choice or most preferred option. Telework as accommodation has expanded substantially post-COVID. The interactive process The ADA requires an "interactive process", an informal, individualized dialogue between employer and employee to identify accommodation needs and options. The process typically: (1) employee notice , employee notifies employer of need (medical certification often required); (2) information exchange , employer obtains needed medical information about limitations and accommodation needs; (3) accommodation identification , discussion of possible accommodations; (4) implementation ; (5) monitoring and adjustment . Failure to engage in good-faith interactive process can independently support liability, even where no specific accommodation is denied. The process is collaborative, failures in process create liability independent of accommodation outcomes. Undue hardship Employers can refuse otherwise reasonable accommodations that would impose "undue hardship", significant difficulty or expense considering: (1) cost of accommodation; (2) overall financial resources of employer; (3) size of facility/employer; (4) type of operations; (5) impact on operations. Undue hardship is a high bar; cost alone rarely justifies denial for large employers. Documentation of the cost-benefit analysis is critical for asserted undue-hardship defenses. Direct threat to safety can also justify denial of accommodation, but requires individualized assessment, not stereotypes about disability. Pre-employment medical inquiries The ADA imposes specific limitations on medical inquiries: (1) pre-offer , no medical inquiries permitted; only inquiries about ability to perform job functions; (2) post-offer/pre-employment , comprehensive medical inquiries permitted if required of all entering employees in the same job category; offer can be conditioned on medical exam; (3) post-employment , medical inquiries only when "job-related and consistent with business necessity." Improper pre-employment medical inquiries are common ADA violations. Damages and remedies ADA Title I damages parallel Title VII: (1) back pay and front pay ; (2) compensatory damages for emotional distress; (3) punitive damages for malicious or reckless violations; (4) injunctive relief ; (5) attorney's fees . Compensatory and punitive damages are subject to combined caps under the Civil Rights Act of 1991: $50K (15-100 employees), $100K (101-200), $200K (201-500), $300K (500+). Damage caps make ADA cases more economically constrained than ADEA's uncapped liquidated damages. Practical context For Texas employers, ADA compliance is detail-intensive and litigation-prone. Best practice: (1) maintain accurate, current job descriptions identifying essential vs. marginal functions; (2) train managers on ADA basics, particularly reasonable accommodation and interactive process; (3) document interactive process steps contemporaneously; (4) develop accommodation analysis frameworks for common requests (telework, modified schedules, leave); (5) coordinate ADA with FMLA (overlapping but distinct frameworks); (6) limit pre-employment medical inquiries strictly to ability-to-perform questions; (7) review job postings and screening processes for accidentally discriminatory criteria. For employees: (1) request accommodation in writing with medical support; (2) engage actively in interactive process; (3) document employer responses; (4) preserve EEOC charge deadlines. Common pitfall: employers treating accommodation as adversarial rather than interactive, generating both ADA liability and adverse practical outcomes. Companion article: Before Firing an Employee Related Terms Title VII · Family and Medical Leave Act · Texas Commission on Human Rights Act · EEOC Charge · Workplace Discrimination Annual Meeting § The regular yearly gathering at which shareholders of a Texas corporation elect directors and conduct other business properly brought before the meeting. Required of every Texas for-profit corporation. An annual meeting of the shareholders is the regular yearly gathering at which shareholders of a Texas corporation elect directors and conduct other business properly brought before the meeting. Required of every Texas for-profit corporation. Authority Tex. Bus. Orgs. Code § 21.351 (annual meeting); § 21.353 (notice); § 21.357 (record date); § 21.3521 (remote communication); § 21.655 (close corporations). Timing and place Held at the time stated in (or set in accordance with) the corporation's bylaws. § 21.351(a) . The corporation determines whether to hold the meeting in person, by remote communication under § 21.3521 , or by hybrid means. Shareholder remedy for failure to hold Under § 21.351(b) , a shareholder who has previously submitted a written request may petition the district court in the county of the corporation's principal executive office to order a meeting if the annual meeting has not been held (or no written consent in lieu has been executed) within any 13-month period. No automatic dissolution Failure to hold an annual meeting does not result in winding up or termination. § 21.351(c) . Practical context Closely-held corporations frequently dispense with formal annual meetings via § 21.655 close-corporation election or via written consent in lieu of meeting under § 6.202 . Related Terms Shareholder · Corporation · Bylaws · Special Meeting · Quorum · Action by Written Consent Answer § The defendant's responsive pleading to a petition or complaint, addressing each allegation and asserting affirmative defenses or counterclaims. Establishes the issues for litigation; failure to raise certain defenses by the deadline waives them. The answer is the defendant's responsive pleading to a petition or complaint, addressing each allegation and asserting any affirmative defenses or counterclaims. The answer establishes the issues for litigation and may waive defenses not properly raised. Authority Tex. R. Civ. P. 92 (general denial); Tex. R. Civ. P. 94 (affirmative defenses); Tex. R. Civ. P. 95 (pleas in bar); Tex. R. Civ. P. 97 (counterclaims and crossclaims). Federal: Fed. R. Civ. P. 8(b) (admission and denial); 8(c) (affirmative defenses); 12 (motions to dismiss). Texas general denial Under TRCP 92 , a defendant may file a general denial that puts at issue all matters that may be proved by the plaintiff. The general denial is a Texas-specific procedural device, federal practice requires specific responses to each allegation under FRCP 8(b) . The general denial significantly reduces drafting burden in Texas state court. Verified denials Certain issues require verified specific denials under TRCP 93 , including denial of execution of a written instrument, denial of partnership or corporate status, and denial of authority to sue or be sued. Failure to verify-deny these matters means they are admitted. Affirmative defenses Defenses that avoid the cause of action even if all alleged facts are true (statute of limitations, payment, release, accord and satisfaction, fraud, waiver) must be specifically pleaded under TRCP 94 , not by general denial. Counterclaims Defendants may assert counterclaims against the plaintiff under TRCP 97 . Compulsory counterclaims must be asserted in the answer or are waived. Permissive counterclaims may be asserted at the defendant's discretion. Timing Texas state court: typically 10:00 a.m. on the Monday following 20 days after service. Federal court: 21 days after service of summons and complaint, or 60 days for U.S. defendants and waivers of service. Practical context Failure to plead an affirmative defense by the deadline waives it. Failure to verify-deny matters requiring TRCP 93 verification admits them. Sophisticated answer drafting includes all known affirmative defenses (even speculative ones) to preserve them. Related Terms Petition / Complaint · Motion to Dismiss · Discovery Arbitration § 2024 A private dispute-resolution process in which the parties submit their dispute to neutral arbitrators whose decision is binding. Substitutes for traditional court litigation. Governed by the FAA (interstate) and Texas General Arbitration Act (intrastate). Arbitration is a private dispute-resolution process in which the parties submit their dispute to one or more neutral arbitrators whose decision (the "arbitration award") is binding on the parties. Arbitration substitutes for traditional court litigation, generally producing a faster, more confidential, and more limited proceeding governed by rules selected in the arbitration agreement. Authority Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–16 . Texas General Arbitration Act (TAA), Tex. Civ. Prac. & Rem. Code Ch. 171 . Texas international commercial arbitration: Tex. Civ. Prac. & Rem. Code Ch. 172 . Recent Supreme Court decisions: Smith v. Spizzirri , 601 U.S. 472 (2024); Morgan v. Sundance , 596 U.S. 411 (2022); Coinbase, Inc. v. Suski , 144 S. Ct. 1186 (2024). Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFAA), 9 U.S.C. §§ 401–402 . FAA preemption framework The FAA applies to any arbitration agreement in a written contract evidencing a transaction involving interstate commerce. Allied-Bruce Terminix , 513 U.S. 265 (1995). FAA § 2 makes such agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The FAA broadly preempts state law that disfavors arbitration or interferes with its fundamental attributes. AT&T Mobility v. Concepcion , 563 U.S. 333 (2011). FAA vs. TAA Most Texas commercial arbitrations are governed by the FAA because they involve interstate commerce. The TAA applies as a default for purely-intrastate arbitrations and where parties expressly contract for TAA application. A general choice-of-Texas-law clause is not sufficient to invoke TAA over FAA, the agreement must specifically state that the TAA controls. The two statutes are largely parallel in operation. Enforceability of arbitration agreements Generally-applicable contract defenses (fraud, duress, unconscionability) may invalidate arbitration agreements without triggering FAA preemption. Doctor's Associates v. Casarotto , 517 U.S. 681 (1996). Mass-arbitration tactics, class-action waivers, and delegation clauses (which assign threshold enforceability questions to the arbitrator) are routinely upheld. Epic Systems v. Lewis , 138 S. Ct. 1612 (2018). Court's role under the FAA Stay or compel: under FAA §§ 3–4 , a party seeking arbitration may move to stay the litigation and compel arbitration. Smith v. Spizzirri (2024) held that courts must stay rather than dismiss cases subject to arbitration when a party requests a stay. Confirm or vacate: under FAA §§ 9–11 , an arbitration award must be confirmed within one year, and any objection (motion to vacate) must be filed within three months. Grounds for vacatur are narrowly limited to corruption, fraud, partiality, misconduct, or arbitrators exceeding their powers. § 10 . EFAA carveout (eff. March 3, 2022) Pre-dispute arbitration agreements and joint-action waivers are unenforceable as to claims of sexual harassment or sexual assault, at the election of the person alleging the conduct. The provision applies prospectively only, to disputes arising on or after the enactment date, regardless of when the arbitration agreement was signed. Waiver Morgan v. Sundance (2022) held that waiver of arbitration does not require a showing of prejudice, ordinary contract waiver principles apply. A defendant who litigates substantively for an extended period before invoking arbitration may be held to have waived the right. Practical context Arbitration clauses are the default in most U.S. commercial contracts, employment agreements (subject to EFAA), and consumer adhesion contracts. Sophisticated drafting addresses (1) FAA vs. TAA selection; (2) the arbitration provider (AAA, JAMS, ICDR); (3) seat and venue; (4) scope (including which threshold questions go to the arbitrator); (5) discovery; (6) class waivers; (7) appellate procedure. Companion article: Contract Disputes in Texas Related Terms Mediation · Choice of Law / Choice of Forum · Texas Business Court · Personal Jurisdiction Asset Purchase § A transaction structure in which the buyer acquires specified assets (and typically assumes specified liabilities) of a target business, rather than acquiring the target's equity. The selling entity continues to exist after closing, holding unsold assets, retained liabilities, and the purchase price. An asset purchase is a transaction structure in which the buyer acquires specified assets (and typically assumes specified liabilities) of a target business, rather than acquiring the target's equity. The selling entity continues to exist after closing, holding the unsold assets, retained liabilities, and the purchase price. Authority Tex. Bus. Orgs. Code §§ 21.451–21.457 (sale of all or substantially all assets); § 21.451(2) (definition); § 21.455 (shareholder approval); § 10.254 (the Texas-distinctive successor-liability statute) . Scope of "all or substantially all" Texas requires shareholder approval for a sale of "all or substantially all" of a corporation's property and assets outside the ordinary course of business. § 21.451 . The phrase is not statutorily defined for LLCs and is interpreted on a fact-intensive basis for corporations, the leading consideration is whether the sale would substantially defeat the purpose for which the corporation exists. The Texas successor-liability statute (§ 10.254) A disposition of property by a Texas domestic entity is not a merger for any purpose, and the acquiring entity may not be held responsible or liable for any liability of the transferring entity that is not expressly assumed in the purchase agreement, except as otherwise provided by other applicable statutes. § 10.254(b) . This statute is the principal reason buyers prefer asset purchases over stock purchases for Texas targets, combined with careful contractual drafting, it provides substantial protection against successor liability. Limits on § 10.254 protection Despite § 10.254 , Texas courts have recognized common-law successor-liability exceptions in certain circumstances: (1) express or implied assumption of liabilities; (2) de facto merger (rejected by § 10.254 as a matter of state corporate law, but recognized in some federal contexts and product-liability cases); (3) mere continuation; and (4) fraudulent transfer to escape liability. Tex. Tax Code § 111.020 imposes statutory successor liability for unpaid sales and use taxes, requiring the buyer to withhold from purchase price or obtain a Comptroller's certificate of no tax due. Practical context Asset purchases are the dominant Texas M&A structure for sales of operating businesses where the buyer is paying primarily for operating assets and goodwill, and where the seller has tax loss carryforwards or contingent liabilities the buyer wishes to leave behind. The trade-off: contracts, licenses, and permits typically require third-party consents to assign, adding closing complexity that stock purchases avoid. Companion article: Selling Your Business in Texas Related Terms Stock Purchase · Merger · Conversion · Due Diligence · Representations and Warranties At-Will Employment § The Texas default rule that, absent a contract specifying a fixed term or limiting termination rights, either party may terminate employment at any time, for any reason or no reason, with or without notice. Among the strictest at-will doctrines in the country, with only narrow common-law and statutory exceptions. At-will employment is the Texas default rule that, absent a contract specifying a fixed term or limiting termination rights, either the employer or the employee may terminate the employment relationship at any time, for any reason or no reason, with or without notice. Texas at-will employment is among the strictest in the country, with only narrow common-law and statutory exceptions. Authority Texas common law: East Line & R.R.R. Co. v. Scott , 72 Tex. 70, 10 S.W. 99 (1888) (establishing the at-will rule). Sabine Pilot Service, Inc. v. Hauck , 687 S.W.2d 733 (Tex. 1985) (recognizing the public-policy exception). Montgomery County Hospital District v. Brown , 965 S.W.2d 501 (Tex. 1998) (limiting modification of at-will status). Federal and state anti-discrimination statutes: Title VII (42 U.S.C. § 2000e et seq.); ADEA (29 U.S.C. § 621 et seq.); ADA (42 U.S.C. § 12101 et seq.); Texas Commission on Human Rights Act, Tex. Lab. Code Ch. 21. The default rule Under East Line , the Texas presumption is that an employment relationship of indefinite duration is at-will. The presumption applies whether the employee is paid hourly, salaried, or by commission, and whether the position is entry-level or executive. The Sabine Pilot exception The Texas Supreme Court in Sabine Pilot recognized a single, narrow common-law exception: an employer may not terminate an employee for the sole reason that the employee refused to perform an illegal act for which the employee would be personally liable. The Sabine Pilot exception is interpreted strictly, refusal to engage in conduct that is unethical, dangerous, or contrary to public policy but not personally criminal does not trigger the exception. Statutory exceptions At-will termination may not be based on (1) protected characteristics under federal or Texas anti-discrimination statutes; (2) retaliation for protected activity (whistleblowing under specific statutes, FMLA leave, workers' compensation claims under Tex. Lab. Code § 451.001 , jury service under Tex. Civ. Prac. & Rem. Code § 122.001 ); (3) refusal to violate election laws; or (4) other narrowly-defined statutory protections. Modification of at-will status Under Montgomery County Hospital District , oral statements about job security or general employer policy do not modify at-will status. Modification requires a clear, specific agreement, typically a written employment agreement specifying a fixed term or "for cause" termination requirement. Practical context Texas's strict at-will rule is widely viewed as employer-favorable but creates predictability for both parties. Employees seeking job security typically negotiate written employment agreements with for-cause termination provisions, severance arrangements, or notice requirements. The narrow scope of Sabine Pilot is frequently misunderstood by terminated employees who have moral or ethical complaints about their employer's conduct that fall outside the criminal-act exception. Companion article: Before Firing an Employee in Texas Related Terms Wrongful Termination · Employment Agreement · Severance Agreement · Workplace Discrimination Attachment § The point at which a security interest becomes enforceable against the debtor as to the collateral. Under Tex. Bus. & Com. Code § 9.203, attachment requires three elements: value given by the secured party, the debtor having rights in the collateral, and (typically) authentication of a security agreement describing the collateral. Distinct from perfection, which establishes priority against third parties. Attachment is the point at which a security interest becomes enforceable against the debtor as to the collateral. Attachment is the threshold event in any secured transaction, without attachment, no security interest exists, and questions of perfection, priority, and enforcement do not arise. Texas adopts the Uniform Commercial Code framework with limited non-uniform variations. Authority Texas UCC Article 9 (Secured Transactions): Tex. Bus. & Com. Code Ch. 9 . Core attachment provision: § 9.203 (attachment and enforceability of security interest; proceeds; supporting obligations; formal requisites). Definitions: § 9.102 . Scope: § 9.109 . Authentication: § 9.102(a)(7) . After-acquired property: § 9.204 . Foundational federal preemption framework: 11 U.S.C. § 506 (secured claim status in bankruptcy). Three elements of attachment Under § 9.203, a security interest attaches to collateral when (1) value has been given by the secured party, typically a loan, extension of credit, or pre-existing claim; (2) the debtor has rights in the collateral or the power to transfer rights to the secured party, meaning the debtor must own the collateral or have authority to encumber it; and (3) one of four authentication conditions is satisfied : (a) the debtor authenticates a security agreement describing the collateral; (b) the secured party has possession of the collateral pursuant to security agreement; (c) the secured party has control of certain types of collateral (deposit accounts, electronic chattel paper, investment property, letter-of-credit rights); or (d) the collateral is a certificated security delivered to the secured party. The composite-document doctrine The "security agreement" requirement is satisfied by any record that the debtor authenticates and that contains a description of the collateral sufficient to reasonably identify it. Texas applies the composite-document doctrine, multiple signed documents read together can satisfy the security-agreement requirement even if no single document contains all the elements. A financing statement alone is insufficient; it can serve as part of a composite security agreement only if it is authenticated by the debtor and contains the description of collateral. Attachment vs. perfection Attachment makes the security interest enforceable between debtor and secured party. Perfection is a separate, additional step that establishes priority against third parties, other secured creditors, lien creditors, and bankruptcy trustees. A security interest can be attached but unperfected, in which case it binds the debtor but loses priority disputes against perfected creditors and the trustee in bankruptcy. The two concepts are distinct but sequential: attachment must occur first; perfection (filing, possession, or control) follows. After-acquired property Section 9.204 permits security agreements to cover after-acquired property of the same kind. The security interest in after-acquired collateral attaches automatically when the debtor acquires rights in that property, assuming the security agreement contains an after-acquired property clause and the other attachment requirements are satisfied. Common exclusions: consumer goods (with narrow exceptions) and commercial tort claims (after-acquired clauses generally ineffective). Proceeds attachment Under § 9.203(f), a security interest attaches automatically to identifiable proceeds of collateral. If a debtor sells inventory subject to a security interest, the security interest follows the proceeds (cash, accounts receivable, replacement goods) without separate attachment. Tracking proceeds and maintaining their identifiability is a practical challenge in commingled accounts. Practical context For Texas commercial lenders, attachment is rarely litigated as a stand-alone issue but frequently dispositive in bankruptcy and priority disputes. Best practice: (1) ensure the security agreement contains a sufficient collateral description and is authenticated by the debtor; (2) document the value given; (3) confirm the debtor's ownership rights in the collateral (particularly for after-acquired property); (4) include an after-acquired property clause where appropriate; (5) record the date of attachment for priority and bankruptcy preference analysis. Failure of any element means the secured party is an unsecured creditor. Related Terms Perfection · Security Interest · Financing Statement · Collateral · Priority Attorney's Fees Recovery § 2021 The conditions and procedures under which a Texas litigant may recover its attorney's fees from the opposing party. Texas follows the American Rule (each side pays its own fees) absent a statutory or contractual exception. The principal statutory exception is Tex. Civ. Prac. & Rem. Code § 38.001, which allows fee recovery on enumerated claim types; HB 1578 (effective September 1, 2021) expanded the statute to permit recovery against LLCs, partnerships, and other organizations. Texas attorney's fees recovery operates under the American Rule by default, each litigant pays its own fees regardless of outcome, unless a statute or contract authorizes fee shifting. The principal statutory authorization is Chapter 38 of the Texas Civil Practice and Remedies Code, which permits a prevailing party to recover reasonable and necessary attorney's fees on contract claims and certain other enumerated causes of action. HB 1578 (effective September 1, 2021) closed a long-standing loophole that had limited § 38.001 recovery to claims against "individuals or corporations," excluding LLCs and partnerships. Authority General attorney's fees statute: Tex. Civ. Prac. & Rem. Code Ch. 38 : § 38.001 (enumerated claims supporting recovery, services, labor, materials, sworn account, oral or written contract); § 38.002 (procedural prerequisites, presentment of claim and 30-day demand); § 38.005 (liberal construction). HB 1578: 87th Leg. (2021), eff. Sept. 1, 2021 (replacing "individual or corporation" with "individual or organization" and adopting Tex. Bus. Orgs. Code § 1.002(62) definition). Reasonable-fee proof standard: Rohrmoos Venture v. UTSW DVA Healthcare, LLP , 578 S.W.3d 469 (Tex. 2019); El Apple I, Ltd. v. Olivas , 370 S.W.3d 757 (Tex. 2012). Mandatory recovery on prevailing contract claim: Trevino v. City of Pearland , 531 S.W.3d 290 (Tex. App.-Houston [14th Dist.] 2017, no pet.). Statutory framework, § 38.001 Section 38.001 enumerates the claim types supporting fee recovery: rendered services; performed labor; furnished material; freight or express overcharges; lost or damaged freight or express; killed or injured stock; sworn account; and oral or written contract. The contract category is by far the most frequently invoked. Recovery is mandatory if the claimant prevails on a valid claim and proves reasonable and necessary fees, the trial court has no discretion to deny fees, only discretion as to amount. HB 1578 expansion (post-September 2021) Before HB 1578, § 38.001 limited fee recovery to claims against "an individual or corporation", language Texas appellate courts strictly construed to exclude LLCs, partnerships, LLPs, and other organizational forms ( Fleming & Associates, L.L.P. v. Barton , 425 S.W.3d 560 (Tex. App.-Houston [14th Dist.] 2014, pet. denied)). HB 1578 replaced "corporation" with "organization" and incorporated the Texas Business Organizations Code's broad definition of "organization", capturing virtually every commercial entity form. The change applies prospectively to actions filed on or after September 1, 2021. Procedural prerequisites, presentment Section 38.002 imposes a presentment requirement: the claimant must (1) be represented by an attorney; (2) present the claim to the opposing party; and (3) wait at least 30 days from presentment without payment. Failure to plead and prove presentment defeats fee recovery on the underlying claim. Presentment may be by letter, oral demand, or service of pleadings; the safest practice is a written demand with retained delivery proof, made well in advance of judgment. Reasonable and necessary, the lodestar method Rohrmoos Venture v. UTSW DVA Healthcare, LLP , 578 S.W.3d 469 (Tex. 2019), is the foundational modern Texas case on fee proof. The Texas Supreme Court adopted the lodestar method as the starting point: hours reasonably expended × reasonable hourly rate = base lodestar. Adjustments are then made (rarely upward, occasionally downward) based on the Arthur Andersen factors: time and labor required; novelty and difficulty; skill required; preclusion of other employment; customary fee; fixed or contingent nature; time limitations; results obtained; experience and reputation; and undesirability. Fee proof requires contemporaneous, detailed billing records describing tasks, time spent, and personnel involved. Other fee-shifting authorities Beyond § 38.001, Texas has dozens of cause-specific fee-shifting statutes: (1) DTPA , Tex. Bus. & Com. Code § 17.50(d) (mandatory for prevailing consumer); (2) Texas Business Court , bespoke fee provisions; (3) Texas Citizens Participation Act (anti-SLAPP) , Tex. Civ. Prac. & Rem. Code § 27.009 (mandatory for movant on dismissed claim); (4) declaratory judgment actions , § 37.009 (discretionary); (5) UCC sales , Tex. Bus. & Com. Code § 2.710 ; (6) tortious interference with certain contracts; (7) fraud in real estate transactions; (8) franchise act ; (9) family code ; (10) federal civil rights ( 42 U.S.C. § 1988 ). Contractual fee-shifting clauses are generally enforceable absent unconscionability or specific statutory override. Segregation of fees Texas requires segregation of fees among recoverable and non-recoverable claims ( Tony Gullo Motors I, L.P. v. Chapa , 212 S.W.3d 299 (Tex. 2006)). Where fees are not capable of meaningful segregation because the claims are inextricably intertwined, full recovery is permitted; where segregation is possible, failure to segregate forfeits recovery on the non-segregated portion. The segregation requirement creates substantial bookkeeping discipline, billing entries should identify the claim or task category from inception. Practical context For Texas commercial litigants, attorney's fees are often the dominant economic stake, particularly in contract disputes where damages are limited but legal expense is substantial. Best practice for plaintiffs: (1) confirm the underlying claim qualifies under § 38.001 or another fee-shifting authority; (2) make formal presentment in writing well before suit; (3) maintain detailed contemporaneous billing records segregated by claim and task; (4) confirm HB 1578 reach for claims against LLC/partnership defendants; (5) prepare a Rohrmoos-compliant fee affidavit at trial. For defendants, the threat of fee shifting on contract claims is itself a settlement driver, even a modest underlying claim with $200K+ in fees behind it warrants serious settlement attention. Related Terms Summary Judgment · Sanctions · Declaratory Judgment Act · Texas Business Court Automatic Stay § An immediate, self-executing injunction triggered by the filing of a bankruptcy petition under 11 U.S.C. § 362. Halts virtually all creditor collection actions against the debtor or property of the bankruptcy estate, lawsuits, foreclosures, repossessions, garnishments, and informal collection. Provides the debtor breathing space and ensures orderly bankruptcy administration. Specific exceptions exist (criminal proceedings, certain tax matters, domestic support obligations). Violations can carry actual damages, punitive damages, and attorney's fees. The Automatic Stay is an immediate, self-executing injunction triggered by the filing of a bankruptcy petition under 11 U.S.C. § 362. The stay halts virtually all creditor collection actions against the debtor or property of the bankruptcy estate. Among the most powerful tools in U.S. bankruptcy law, the automatic stay provides the debtor breathing space and ensures orderly bankruptcy administration by centralizing creditor claims in a single forum. Authority Federal statute: 11 U.S.C. § 362 (automatic stay). Scope: § 362(a) . Exceptions: § 362(b) . Relief from stay: § 362(d) . Damages for violation: § 362(k) . Foundational cases: Soares v. Brockton Credit Union (In re Soares) , 107 F.3d 969 (1st Cir. 1997); In re Sherk , 918 F.2d 1170 (5th Cir. 1990). Scope of the stay Section 362(a) stays virtually all creditor actions: (1) commencement or continuation of judicial, administrative, or other proceedings against the debtor; (2) enforcement of pre-petition judgments; (3) acts to obtain possession of property of the estate; (4) acts to create, perfect, or enforce liens against estate property; (5) acts to collect, assess, or recover pre-petition claims; (6) setoffs of pre-petition debts; (7) certain tax court proceedings. The stay applies immediately on petition filing without any court order required. Common exceptions, § 362(b) Specific exceptions allow continuation of: (1) criminal proceedings; (2) domestic support obligations and certain related proceedings; (3) tax audits, deficiency notices, and certain assessments; (4) governmental regulatory and police power actions (not collection of money judgments); (5) certain securities-related setoffs; (6) commercial real estate evictions in some circumstances; (7) negotiation of certain commercial loan terms. The exceptions reflect public policy judgments about which actions outweigh debtor breathing-space goals. Relief from stay, § 362(d) Creditors can seek relief from stay on grounds: (1) cause , including lack of adequate protection of secured creditor's interest; (2) no equity in property + property not necessary for effective reorganization ; (3) single asset real estate cases with specific timing requirements; (4) in rem orders for serial filers. Relief motions are heard on expedited schedule. Common relief grounds: foreclosure on unprotected collateral, eviction for non-payment of rent, continuation of pending litigation. Damages for violations Section 362(k) provides damages for willful stay violations: (1) actual damages , losses caused by violation; (2) attorney's fees ; (3) punitive damages in appropriate circumstances. "Willful" means knowing of the bankruptcy filing and intentionally taking the action, not requiring specific intent to violate. Common violations: continued collection calls, repossessions after notice, garnishments not stopped. Sophisticated creditors maintain bankruptcy notice protocols to avoid violations. Practical context For Texas creditors, automatic stay compliance is operational. Best practice: (1) maintain bankruptcy notice protocols, search PACER, register for ECF notifications; (2) immediately halt all collection upon notice of filing; (3) coordinate with collection agents and counsel; (4) seek relief from stay through proper motion when appropriate; (5) document compliance to defend against violation claims. For debtors: (1) understand stay scope and exceptions; (2) provide notice to creditors promptly; (3) document violations contemporaneously with damage evidence; (4) coordinate with bankruptcy counsel for stay enforcement. Related Terms Chapter 11 · Chapter 7 · Debtor-in-Possession · Workout and Restructuring · Nonjudicial Foreclosure B Bank Secrecy Act § 2025 The foundational U.S. anti-money-laundering statute; requires financial institutions, including money transmitters and, since the GENIUS Act, payment-stablecoin issuers, to maintain AML programs and report suspicious activity to FinCEN. The Bank Secrecy Act (BSA), enacted in 1970, is the core federal anti-money-laundering (AML) framework. It requires “financial institutions” to keep records and file reports that help detect and prevent money laundering, including customer identification, transaction monitoring, currency transaction reports, and suspicious activity reports. It is administered by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury. For fintech, the BSA reaches further than many founders expect. Money services businesses, including money transmitters and many cryptocurrency businesses, are financial institutions subject to BSA registration and to a written, risk-based AML program. The GENIUS Act of 2025 expressly brought payment-stablecoin issuers inside the BSA as financial institutions. A BSA/AML program is not a policy document filed and forgotten. It requires a designated compliance officer, ongoing training, independent testing, and monitoring proportionate to the institution's risk. For a money-movement product, the BSA program is a launch prerequisite, not a later cleanup. Authority 31 U.S.C. §§ 5311–5336 (Bank Secrecy Act); 31 C.F.R. Chapter X (FinCEN implementing regulations); 31 C.F.R. Part 1022 (AML programs for money services businesses). Basket / Deductible § A contractual threshold below which a buyer cannot recover indemnification for breaches of seller's representations and warranties. The basket aligns indemnification with material rather than trivial breaches. A basket (sometimes called a "deductible") is a contractual threshold below which a buyer cannot recover indemnification for breaches of seller's representations and warranties. The basket aligns indemnification with material rather than trivial breaches, sparing the parties the cost of disputing small claims. Authority No statutory authority, baskets are creatures of contract. Two structures Tipping basket (also called "first-dollar"): once aggregate losses exceed the basket threshold, the buyer recovers all losses from the first dollar , including the threshold amount. Buyer-favorable. Deductible basket (also called "true deductible" or "non-tipping"): once aggregate losses exceed the threshold, the buyer recovers only the amount above the threshold . The seller permanently retains losses up to the threshold. Seller-favorable. The choice between structures is one of the most consequential basket-related negotiations. Per-claim minimums (the "mini-basket" or "de minimis") Many baskets include a per-claim minimum threshold, claims below the per-claim minimum do not count toward the basket aggregate. Typical mini-basket: $5,000 to $50,000 per claim depending on deal size. Typical sizing Basket size is typically 0.5%–1% of enterprise value. Baskets are typically inapplicable to fundamental reps, tax reps, fraud, special indemnities, and (where present) covenants. Practical context The basket structure interacts with RWI retention, most RWI policies have their own retention (typically 0.5% of enterprise value as of 2025), and the basket and retention are often coordinated such that the buyer's economic exposure is uniform from dollar one of loss. Companion article: Selling Your Business in Texas Related Terms Indemnification (M&A) · Indemnification Cap · Representations and Warranties · Escrow Beneficial Ownership Information (BOI) Reporting § 2026 A federal reporting regime under the Corporate Transparency Act requiring disclosure of beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Following FinCEN's March 2025 interim final rule, all entities formed in the United States are exempt from BOI reporting; the obligation now applies only to foreign-formed entities registered to do business in the U.S. Beneficial Ownership Information (BOI) reporting is a federal disclosure regime created by the Corporate Transparency Act (CTA), administered by the Financial Crimes Enforcement Network (FinCEN). The CTA originally required nearly all U.S. business entities to disclose their beneficial owners to FinCEN. Following the volatile 2024-2025 litigation and rulemaking cycle, FinCEN's March 2025 interim final rule narrowed the obligation: as of May 2026, entities formed in the United States are exempt; only foreign-formed entities registered to do business in a U.S. state remain subject to BOI reporting. Authority Corporate Transparency Act, 31 U.S.C. § 5336 . FinCEN implementing regulations: 31 C.F.R. § 1010.380 . FinCEN Beneficial Ownership Information Reporting Requirement Revision and Deadline Extension (interim final rule), 90 Fed. Reg. 13,688 (Mar. 26, 2025). Constitutional challenge: National Small Business United v. U.S. Department of the Treasury (CTA held unconstitutional at district court, March 2024); Texas Top Cop Shop, Inc. v. Bondi (nationwide injunction Dec. 2024, Fifth Circuit stay); Community Associations Institute v. Yellen , ___ F.4th ___ (11th Cir. Dec. 16, 2025) (CTA constitutional under Commerce Clause). Current state, most U.S. entities exempt Under FinCEN's March 26, 2025 interim final rule, the regulatory definition of "reporting company" was revised to exclude all entities formed in the United States. As a result, U.S.-formed corporations, LLCs, limited partnerships, and similar entities, including those previously known as "domestic reporting companies", are not required to file initial, updated, or corrected BOI reports. U.S. persons are also exempt from being identified as beneficial owners of foreign reporting companies. What still requires reporting Foreign-formed entities (formed under the law of a foreign country) that have registered to do business in any U.S. state or tribal jurisdiction by filing with a secretary of state or similar office remain "reporting companies" under the interim final rule. These entities must file BOI reports identifying their beneficial owners, with deadlines extended to at least 30 days from the rule's effective date. The 23 statutory exemptions for entities such as banks, public companies, and large operating companies continue to apply. Regulatory volatility, current as of May 2026 The interim final rule has not yet been finalized. The Eleventh Circuit's December 2025 decision upholding the CTA's constitutionality preserves the statute itself, but FinCEN's narrowed scope under the interim rule remains in force. Future regulatory or legislative changes could restore broader reporting obligations. Texas businesses should monitor the regulatory posture and retain documentation supporting beneficial-owner determinations even while the reporting obligation is suspended. Practical context For Texas SMBs, the BOI reporting saga has become a study in regulatory whiplash. The current posture, most U.S. entities exempt, should be treated as the operative rule rather than the permanent rule. Best practice: maintain a current beneficial-owner list as part of corporate-records hygiene regardless of the federal reporting status, since (1) state-level beneficial-owner regimes may emerge; (2) banking, lending, and M&A diligence frequently require beneficial-ownership disclosure; and (3) any future restoration of CTA reporting will likely come with short compliance windows. Related Terms Corporation · Limited Liability Company · Foreign Entity · Certificate of Formation · Registered Agent Books and Records § 2025 Corporate documents, accounts, and communications a Texas corporation must maintain and that shareholders may inspect on written demand. Scope substantially narrowed by SB 29 effective May 14, 2025. "Books and records" refers to the corporate documents, accounts, and communications that a Texas corporation is required to maintain and that shareholders have a statutory right to inspect on written demand. The scope of what counts as "books and records", and the circumstances under which inspection may be denied, was substantially narrowed by SB 29 effective May 14, 2025. Authority Tex. Bus. Orgs. Code § 3.151 (records required to be kept); § 21.218 (shareholder inspection right), as amended by SB 29 (eff. May 14, 2025). Records the corporation must keep Under § 3.151 , every Texas corporation must keep: (1) books and records of accounts; (2) minutes of meetings of shareholders, the board, and committees; (3) a record of shareholders giving names, addresses, and number of shares held; and (4) the certificate of formation and bylaws. Inspection right Under § 21.218(b) , a shareholder of record for at least six months immediately preceding the demand or holding at least 5% of all outstanding shares may, on written demand stating a proper purpose, examine and copy specified records of the corporation at a reasonable time. SB 29 narrowing of scope (eff. May 14, 2025) Amended § 21.218 specifies that the records of the corporation do not include emails, text messages, or similar electronic communications, or information from social media accounts, unless the particular communication effectuates an action by the corporation. This change responds to a trend of broad e-discovery-style inspection demands. It applies to all Texas corporations, not solely publicly-traded or opt-in corporations. Additional restriction for opt-in corporations (§ 21.218(b-2)) A corporation that is publicly traded or that has opted into the codified business judgment rule under § 21.419 may deny an inspection demand if the corporation reasonably determines that the demand is in connection with (1) a derivative proceeding instituted or expected to be instituted by the demanding holder, or (2) an active or pending civil lawsuit in which the holder is or is expected to be an adversarial named party. The right to obtain records through ordinary discovery in pending litigation is preserved. Practical context SB 29's narrowing of § 21.218 is one of the most consequential SB 29 changes for ordinary corporate operations. Pre-suit "fishing expeditions" through books-and-records demands are now substantially harder to maintain. Related Terms Shareholder · Corporation · Derivative Action · Business Judgment Rule Broker-Dealer § 2025 A person or entity engaged in the business of buying or selling securities for the account of others (broker) or for their own account (dealer); registration with the SEC and FINRA is generally required. A broker-dealer is a person or entity in the business of buying or selling securities. The "broker" function is acting as agent for the account of customers; the "dealer" function is buying and selling securities for one's own account. Most firms perform both functions and are referred to simply as broker-dealers. Authority The Securities Exchange Act of 1934 § 3(a)(4)-(5) (15 U.S.C. § 78c ) defines "broker" and "dealer." Section 15(a) requires registration with the Securities and Exchange Commission. SEC Rule 15a-6 governs the limited circumstances in which foreign broker-dealers may transact with U.S. persons without full registration. The Financial Industry Regulatory Authority (FINRA) is the primary self-regulatory organization for U.S. broker-dealers; FINRA Rules 1010-1014 govern member registration. Texas requirements Broker-dealers transacting in Texas must register or qualify for an exemption under the Texas Securities Act, recodified effective January 1, 2022 at Tex. Gov't Code Chapters 4001-4008 . The State Securities Board administers Texas registration. The Texas dealer registration requirement is in addition to federal SEC registration; sales and dealer-conduct rules are administered jointly between FINRA and state regulators. Business Divorce § The negotiated, mediated, or litigated separation of co-owners of a closely-held Texas business, covering contractual, statutory, fiduciary, and judicial mechanisms by which co-owners exit a relationship that has become untenable. "Business divorce" is the practitioners' term for the negotiated, mediated, or litigated separation of co-owners of a closely-held Texas business. It is not codified in the TBOC; it is a descriptive term covering the range of mechanisms, contractual, statutory, fiduciary, and judicial, through which co-owners exit a relationship that has become untenable. Authority For LLCs: Tex. Bus. Orgs. Code §§ 101.451–101.463 (derivative actions); § 101.107 (no withdrawal absent contract); § 101.401 (contractual fiduciary-duty modification, as amended May 14, 2025); § 11.314 (judicial winding up). For corporations: §§ 21.551–21.563 (derivative actions); §§ 21.101–21.110 (shareholders' agreements); §§ 11.404, 11.405 (rehabilitative receivership). Common-law fiduciary duty under Ritchie v. Rupe , Sneed v. Webre . For partnerships: §§ 152.501 et seq.; § 153.110 et seq.; § 11.314 . Five structural approaches Negotiated buy-out under a pre-existing contractual mechanism. The cleanest path. A well-drafted buy-sell agreement or redemption provision in the company agreement, shareholders' agreement, or partnership agreement provides the framework. Most disputes that reach litigation involve a failure of the contractual mechanism. Negotiated buy-out without a pre-existing mechanism. Where the agreement is silent, parties may still negotiate an exit. Mediation is often more economical than the alternatives below. Derivative breach-of-fiduciary-duty action. Under Ritchie v. Rupe and Sneed v. Webre , the principal post-2014 vehicle for minority owners. Closely-held-corporation procedural advantages under TBOC § 21.563 (corporations) and § 101.463 (LLCs), no demand requirement, direct recovery if justice requires, attorney's fees for substantial corporate benefit, make derivative actions a meaningful tool even where the dispute is fundamentally an exit dispute. Judicial winding up under § 11.314 (LLCs and partnerships) or § 11.404 (corporations). The statutory route to ending the business relationship by judicial decree. § 11.314 is the more accessible remedy. See Judicial Dissolution. Sale of the entire business. Where neither party can or will buy out the other, selling to a third party and dividing proceeds may be the only resolution. Requires either contractual authority (shotgun, drag-along) or unanimous consent. Common triggers Squeeze-out or freeze-out tactics by controlling owners; death, disability, divorce, or retirement of a key owner without adequate buy-sell provisions; strategic disagreements; personal conflicts; discovery of fiduciary breaches or self-dealing. Valuation issues Most Texas business divorces ultimately reduce to a valuation question. Texas law does not prescribe a single methodology. Where the company agreement specifies a method, that method controls. Where silent, common methods include discounted cash flow, capitalization of earnings, comparable transactions, asset-based valuation, with marketability and minority-interest discounts. Practical context Texas business divorce practice is heavily front-loaded, what happens at formation governs what happens at the exit. The single most important investment a Texas closely-held business owner can make to avoid expensive business-divorce litigation is careful drafting of the company agreement, shareholders' agreement, or partnership agreement at formation. Where the foundational documents are silent, business divorces become substantially more expensive, more uncertain, and more dependent on the post- Ritchie derivative-action mechanism. Companion article: Business Divorces in Texas Related Terms Shareholder Oppression · Derivative Action · Judicial Dissolution · Closely Held Corporation · Company Agreement · Fiduciary Duty Business Judgment Rule § 2025 A Texas substantive doctrine protecting corporate officers and directors from liability for decisions made in good faith and within the honest exercise of business judgment. As of May 14, 2025, Texas operates two parallel regimes: a common-law version applicable to all entities by default, and a codified version under TBOC § 21.419 for publicly-traded and opt-in corporations. The business judgment rule is a Texas substantive doctrine that protects corporate officers and directors from liability for decisions made within the honest exercise of their business judgment and discretion, even decisions that are negligent, unwise, inexpedient, or imprudent, provided the decisions are made in good faith, with reasonable diligence, and without disabling conflicts of interest. As of May 14, 2025, Texas operates two parallel business judgment rule regimes: a common-law version applicable to all Texas entities by default, and a codified statutory version (Tex. Bus. Orgs. Code § 21.419) that applies to publicly-traded Texas for-profit corporations and any Texas for-profit corporation that affirmatively elects to be governed by it. Common-law authority Cates v. Sparkman , 11 S.W. 846, 848–49 (Tex. 1889) (foundational); Gearhart Indus., Inc. v. Smith Int'l, Inc. , 741 F.2d 707 (5th Cir. 1984); Ritchie v. Rupe , 443 S.W.3d 856, 868 (Tex. 2014); Sneed v. Webre , 465 S.W.3d 169 (Tex. 2015); Texas Outfitters Ltd., LLC v. Nicholson , 572 S.W.3d 647 (Tex. 2019). Statutory reliance: § 3.102 ; § 7.001 . Codified authority (§ 21.419) Tex. Bus. Orgs. Code § 21.419 , added by Senate Bill 29 (89th Leg., R.S.), effective May 14, 2025. Applies to Texas for-profit corporations with shares listed on a national securities exchange and any Texas for-profit corporation that affirmatively elects in its certificate of formation. What the common-law rule does Where the rule applies, courts will not second-guess board decisions and will not substitute their judgment for the directors' judgment. The Texas Supreme Court in Sneed v. Webre described the rule as generally protecting corporate officers and directors from liability for acts within the honest exercise of their business judgment and discretion. What § 21.419 does § 21.419 creates a rebuttable statutory presumption that directors, officers, and other managerial officials acted (1) in good faith; (2) on an informed basis; (3) in furtherance of the corporation's interests; and (4) in obedience to the law and the corporation's governing documents. To rebut the presumption and establish liability, a plaintiff must (a) rebut one or more of the statutory presumptions, and (b) prove that the act or omission constituted a breach of duty, and (c) establish that the breach involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of law. The pleading requirements track Federal Rule of Civil Procedure 9(b), claims must be pleaded with particularity. Limits of the common-law rule Texas courts have held the common-law rule does not protect a director's: (1) grossly negligent acts; (2) ultra vires acts; (3) fraudulent acts; (4) self-dealing transactions; (5) failure to exercise any judgment at all; or (6) uninformed decisions made without reviewing reasonably available material information. See Gearhart , 741 F.2d at 721. Pleading burden Under Texas common law, the rule is a substantive rule, not merely an affirmative defense. Sneed v. Webre , 465 S.W.3d at 178. A plaintiff alleging breach of fiduciary duty by a director generally must plead and prove conduct outside the rule's protections. The Texas Supreme Court has, however, relaxed this pleading burden for shareholders of closely held corporations bringing derivative claims. Sneed v. Webre , 465 S.W.3d at 193. Coverage of the codified rule § 21.419 covers all duties of directors and officers, duty of care, duty of loyalty, and duties relating to interested-party transactions. This expanded scope is a significant departure from the common-law rule, which has historically been most protective in duty-of-care cases. § 21.419 also authorizes the corporation to form committees of independent and disinterested directors to review conflict transactions involving insiders. Interaction with derivative actions For corporations governed by § 21.419 , related SB 29 amendments to § 21.552(a)(3) permit the certificate or bylaws to require a minimum ownership threshold (capped at 3% of outstanding shares) for shareholders to bring a derivative proceeding. § 21.561(c) precludes recovery of attorney's fees in a derivative proceeding involving a § 21.419 corporation if the only result is amended shareholder disclosures. Practical context The business judgment rule is the single most important defense in Texas director and officer litigation. The 2025 split between the common-law version and the codified § 21.419 version creates a meaningful strategic decision for closely-held Texas corporations, affirmatively opting into § 21.419 substantially increases director-and-officer protection but also subjects the corporation to the heightened pleading requirements and ownership thresholds for derivative claims. After Ritchie v. Rupe , breach of fiduciary duty claims (subject to the business judgment rule) became the principal mechanism for challenging board conduct in closely-held Texas corporations; SB 29 has now produced the most director-and-officer-friendly Texas corporate-litigation environment in modern history. Related Terms Fiduciary Duty · Director · Derivative Action · Closely Held Corporation · Texas Business Court · Corporation Buy-Sell Agreement § A contract among owners of a closely-held business establishing terms for transfer of ownership interests upon specified triggering events, death, disability, retirement, termination of employment, divorce, bankruptcy, or voluntary transfer. Typically structured as cross-purchase (owners buy each other's interests), redemption (entity buys back interest), or hybrid. Includes valuation methodology and funding mechanism (often life insurance for death triggers). Foundational governance document for closely-held businesses. A Buy-Sell Agreement is a contract among owners of a closely-held business establishing terms for transfer of ownership interests upon specified triggering events. Buy-sell agreements address the central practical question of closely-held ownership: what happens when an owner dies, becomes disabled, retires, divorces, or wants to leave? Without a buy-sell agreement, surviving owners may be forced to do business with deceased owners' heirs, divorcing spouses, or unfamiliar transferees. The agreement provides predictable transition mechanics and avoids costly disputes. Authority State law: governed by general contract law and entity-specific provisions. Texas: Tex. Bus. Orgs. Code § 21.211 (corporate restrictions on transfer); § 101.106 (LLC membership transfer restrictions). Tax treatment: 26 U.S.C. § 2703 (Chapter 14 valuation rules, must reflect bona fide arm's-length terms to be respected for estate tax). Foundational case: Estate of True v. Commissioner , 390 F.3d 1210 (10th Cir. 2004) (§ 2703 application). Triggering events Standard triggering events: (1) death , typically mandatory buyout; funded with life insurance; (2) disability , typically mandatory after specified period; funded with disability insurance; (3) retirement , typically optional or after age threshold; (4) termination of employment , for owner-employees; mandatory in some structures; (5) divorce , to prevent ex-spouse becoming owner; (6) bankruptcy , to prevent creditor or trustee becoming owner; (7) voluntary transfer , typically subject to right of first refusal; (8) incapacity , long-term inability to participate. Event-specific terms reflect different policy considerations. Cross-purchase vs. redemption vs. hybrid Three principal structures: (1) cross-purchase , remaining owners buy departing owner's interest directly; provides basis step-up to buyers; complex with many owners (each owns life insurance on each other); (2) redemption , entity buys back the interest; simpler administration; no basis step-up to remaining owners; potential dividend-equivalent treatment under some circumstances; (3) hybrid (wait-and-see) , flexibility to choose at trigger time; tax efficiency optimization. Cross-purchase typical for 2-3 owners; redemption typical for larger groups; hybrid for sophisticated structures. Valuation methodology Critical and often disputed component: (1) fixed price , specific dollar amount; updated periodically; simple but stale; (2) formula , multiple of earnings/EBITDA, book value, hybrid; objective but may not reflect market; (3) independent appraisal , qualified appraiser at trigger time; flexible but expensive and disputable; (4) negotiated , parties negotiate at trigger time; likely to fail in adverse situations; (5) most recent valuation , relies on prior 409A or other valuation. Most sophisticated agreements use formula plus appraisal as backup. Funding mechanisms Buy-sell obligations require funding: (1) life insurance , standard for death triggers; can be entity-owned (redemption) or cross-owned (cross-purchase); (2) disability insurance , for disability triggers; expensive and complex; (3) installment payments , typically over 5-10 years with interest; common for retirement and termination triggers; (4) sinking fund , entity sets aside reserves; uncommon; (5) borrowing , entity or remaining owners finance the buyout. Mismatched funding (e.g., promised cash buyout without insurance) creates liquidity crises at trigger time. Valuation discounts and § 2703 Internal Revenue Code § 2703 disregards buy-sell pricing for estate tax unless the agreement: (1) is bona fide business arrangement; (2) is not a device to transfer property to family members for less than full consideration; (3) terms are comparable to similar arms-length arrangements. Aggressive buy-sell discounts can be challenged by IRS at owner death, leading to estate tax based on higher fair market value despite buy-sell price. Sophisticated estate planning coordinates buy-sell terms with § 2703 requirements. Practical context For Texas closely-held businesses, buy-sell agreements are foundational. Best practice: (1) execute at formation when relationships are aligned; (2) review periodically, every 3-5 years or at material changes; (3) coordinate with life and disability insurance funding; (4) ensure valuation methodology produces reasonable results in different market conditions; (5) coordinate with estate planning and § 2703 considerations; (6) address all triggering events comprehensively; (7) include dispute resolution mechanism. Common failures: outdated fixed prices ignored at trigger time; inadequate insurance funding; cross-purchase structures with too many owners; missing trigger events (divorce, bankruptcy commonly omitted); valuation methodologies generating wildly different results in different market conditions. Companion article: Selling Your Business Related Terms Shareholder · Company Agreement · Right of First Refusal · Tag-Along/Drag-Along Rights · Shareholder Oppression Bylaws § 2025 Internal governance rules of a Texas corporation establishing how the corporation operates, board and shareholder meetings, officer duties, voting and quorum, indemnification, and other internal management matters. Bylaws are the internal governance rules of a Texas corporation, the document that establishes how the corporation operates, including procedures for shareholder and board meetings, officer elections and duties, voting and quorum rules, indemnification, and other internal management matters. The bylaws supplement (but do not displace) the certificate of formation and the TBOC. Authority Tex. Bus. Orgs. Code § 21.057 (bylaws); § 21.058 (dual amendment authority); § 21.059 (organization meeting); § 21.001(2) (definition). Adoption Under § 21.057(a) , the initial bylaws are adopted by the board of directors at the organization meeting required under § 21.059 , held after the certificate of formation takes effect. Content Under § 21.057(b) , bylaws may contain any provisions for the regulation and management of the corporation's affairs that are consistent with applicable law and the certificate of formation. Typical Texas bylaws include: number of directors and qualifications; board meeting procedures; officer titles, election, and duties; shareholder meeting procedures; indemnification provisions; share issuance and transfer; fiscal year; and (post-SB 29) forum-selection and jury-waiver provisions. Amendment authority Under § 21.058 , unless the certificate of formation provides otherwise, both the shareholders and the board of directors may amend the bylaws. This dual-authority default is one of the most important provisions for closely-held corporations to consider modifying, the certificate may reserve bylaws-amendment authority to one body or impose supermajority requirements. Bylaws vs. certificate of formation The certificate of formation is the public document filed with the Secretary of State; bylaws are private. Where the two conflict on a matter that may be addressed in either, the certificate generally controls. Some matters must appear in the certificate (classes of stock, par value, exculpation under § 7.001 ); others may appear in either document. Forum-selection and jury-waiver provisions As amended by SB 29 effective May 14, 2025, Tex. Bus. Orgs. Code § 2.115 permits the certificate or bylaws to designate Texas courts (including the Business Court) as the exclusive forum for internal entity claims. New § 2.116 permits enforceable jury-waiver provisions in governing documents. These additions make the bylaws substantially more strategic than they were before May 2025. Indemnification provisions Under § 8.003 (as amended September 1, 2021), restrictions on indemnification or advancement may be set out in any "governing document" of the entity, not solely the certificate. The bylaws may now address indemnification restrictions with the same effect as if they appeared in the certificate. Practical context In Texas corporate practice, the bylaws are where day-to-day governance machinery lives, while the certificate establishes existence and the most fundamental structural choices. Most material amendments can be effected through the bylaws without amending the public certificate. Corporations contemplating opting into SB 29 protections typically amend both the certificate and the bylaws for defense-in-depth. Companion article: Starting a Business in Texas Related Terms Corporation · Certificate of Formation · Director · Shareholder · Indemnification · Texas Business Court C C Corporation § 2025 A for-profit corporation taxed as a separate entity under Subchapter C of the Internal Revenue Code; the default federal tax treatment for corporations and the entity type required for Qualified Small Business Stock under IRC § 1202. A C corporation (often abbreviated "C-corp") is a for-profit corporation taxed under Subchapter C of the Internal Revenue Code. The corporation is treated as a separate taxable entity from its shareholders, paying corporate income tax on its profits at the federal corporate rate (currently 21% under IRC § 11 ). Distributions to shareholders are taxed again as dividends, producing the so-called "double taxation" feature of C-corps. C corporation status is the default treatment for entities organized as corporations under state law. To be taxed as an S corporation, a corporation must affirmatively elect S-corp status via IRS Form 2553, subject to eligibility requirements (limits on shareholder type and count, single class of stock). The C-corp form is required for businesses that intend to issue Qualified Small Business Stock under IRC § 1202 , raise institutional venture capital (which historically prefers Delaware C-corps), or list shares on a public exchange. Authority Internal Revenue Code Subchapter C ( §§ 301-385 ). State corporate law is set by the state of incorporation; in Texas, the Texas Business Organizations Code Chapter 21 governs for-profit corporations. Texas C corporations A Texas C corporation is formed by filing a certificate of formation under Tex. Bus. Orgs. Code § 3.005 and the supplemental provisions of Chapter 21. Texas does not impose a state corporate income tax but does impose a franchise tax on corporations doing business in Texas ( Tex. Tax Code §§ 171.001 et seq. ). The franchise tax is calculated on a margin basis rather than on net income. C-Corporation Tax Treatment § The default federal tax treatment of a corporation under Subchapter C of the Internal Revenue Code. The corporation pays entity-level income tax at the 21% federal rate; shareholders pay a second tax on dividends and capital gains. The "double taxation" structure that S-corp election or LLC pass-through treatment is designed to avoid. C-corporation tax treatment is the default federal tax regime for corporations under Subchapter C of the Internal Revenue Code (IRC §§ 301-385). The corporation pays entity-level federal income tax on its taxable income at the 21% rate set by the Tax Cuts and Jobs Act of 2017. Shareholders pay a second layer of tax on dividends received and on capital gains realized when shares are sold. This "double taxation" structure is the principal reason most closely-held businesses elect S-corporation status or operate as LLCs treated as partnerships for federal tax purposes. Authority Internal Revenue Code: 26 U.S.C. § 11 (corporate income tax rate); §§ 301-385 (Subchapter C). Qualified dividends rates: 26 U.S.C. § 1(h)(11) . Section 1202 partial gain exclusion for C-corp founders: 26 U.S.C. § 1202 . Texas franchise tax applies regardless of federal classification: Tex. Tax Code Ch. 171 . Two layers of tax At the entity level, the corporation pays 21% federal income tax on taxable income (net of deductible expenses). When the corporation distributes after-tax earnings as dividends, individual shareholders pay tax on those dividends at preferential rates of 0%, 15%, or 20% depending on income level (qualified dividends), or at ordinary rates (non-qualified). When shareholders sell their shares at a gain, they pay capital gains tax at 0%, 15%, or 20%. Combined effective rates on distributed earnings approach 36%-39% for top-bracket shareholders. When C-corp is the right answer Despite the double-tax burden, C-corporation status is preferred or required for: (1) businesses planning to seek venture capital, most institutional investors require C-corp structure due to fund partnership tax constraints; (2) businesses with foreign or institutional shareholders not eligible to hold S-corp shares; (3) businesses planning to retain and reinvest earnings rather than distribute; (4) businesses qualifying for the Section 1202 Qualified Small Business Stock exclusion; (5) businesses with multiple classes of stock having different economic rights; and (6) larger ownership groups exceeding the S-corp 100-shareholder cap. Texas dimensions Texas does not impose a state corporate income tax, its franchise tax is a margin-based privilege tax separate from federal income tax classification. A C-corporation operating in Texas pays federal income tax at 21% plus Texas franchise tax (0.75% standard / 0.375% retail-wholesale) on margin above the no-tax-due threshold. The absence of state-level double taxation makes Texas a comparatively favorable C-corp domicile relative to high-income-tax states. Section 1202, the C-corp founder advantage Section 1202 provides a substantial federal capital gains exclusion (potentially 100%) for founders of C-corporations meeting specified Qualified Small Business Stock criteria, provided shares are held for at least five years. This benefit is unavailable to S-corps, LLCs, or partnerships. For founders building toward an exit, the Section 1202 exclusion can outweigh the ongoing double-tax cost. See Section 1202 / Qualified Small Business Stock . Practical context The choice between C-corp and pass-through tax treatment is a foundational decision that should be revisited at each major corporate event, financing rounds, owner additions, acquisition discussions. The 21% C-corp rate and Section 1202 changed the calculus that prevailed before 2018; many founders previously defaulted to LLCs who today should be evaluating C-corp structure for the QSBS optionality. A reasoned tax decision should be documented in the corporate record at formation. Related Terms Corporation · S-Corporation Election · Section 1202 / Qualified Small Business Stock · Texas Franchise Tax · Pass-Through Entity Capitalization Table (Cap Table) § A document or spreadsheet showing the equity ownership of a company, including founders, employees, investors, option holders, and SAFE/note holders. Modern cap tables typically show: outstanding common shares, outstanding preferred (by series), outstanding options, available option pool, outstanding warrants, outstanding SAFEs and notes (with conversion analysis), fully-diluted ownership percentages. Foundational document for any equity transaction, fundraising, or M&A. A Capitalization Table (Cap Table) is a document showing the equity ownership of a company, including founders, employees, investors, option holders, and SAFE/note holders. Modern cap tables are typically maintained as spreadsheets or in specialized cap table software (Carta, Pulley, AngelList Cap Table). Cap tables are foundational to any equity transaction: fundraising, employee option grants, M&A, and investor reporting all require accurate cap table information. The cap table evolves continuously as shares are issued, options are granted and exercised, and SAFEs/notes convert. Authority Cap tables are not statutorily required but are foundational business documents. Underlying authority for accuracy: state corporate law on stock issuance and transfer. Texas: Tex. Bus. Orgs. Code §§ 21.151-21.158 (classes and series); §§ 21.301-21.310 (shares and stockholders). Federal: 17 C.F.R. § 230.502(b) (Reg D disclosure of capitalization). Stock register requirements: state corporate law (Tex. Bus. Orgs. Code § 21.353, shareholders' register). Standard cap table structure Comprehensive cap table includes: (1) common stock , founders, employees (after option exercise), early investors; (2) preferred stock by series , Series Seed, A, B, etc., showing each round's investors and shares; (3) options , outstanding (granted but not exercised), available pool (granted to plan but not yet to specific employees), exercise prices, vesting status; (4) warrants , typically issued to lenders, advisors, or strategic partners; (5) SAFEs , outstanding SAFEs with valuation caps and discounts; (6) convertible notes , outstanding notes with principal, interest, conversion terms; (7) fully-diluted analysis , what percentage each holder owns assuming all options exercised, SAFEs converted, notes converted. Key cap table calculations Critical cap table analyses: (1) fully diluted ownership , assumes all options exercised, all convertibles converted; standard for valuation and ownership analysis; (2) issued and outstanding , actual shares currently outstanding; relevant for voting; (3) basic , outstanding common only; less commonly used; (4) pre-money / post-money , ownership before vs. after a financing; (5) scenario analysis , ownership under various conversion scenarios for SAFEs and notes; (6) liquidation waterfall , proceeds distribution under various exit scenarios considering preferred preferences. Sophisticated cap tables support multiple scenario analyses. The fully-diluted denominator "Fully diluted" includes all securities convertible to common stock: (1) outstanding common; (2) outstanding preferred (on as-converted basis); (3) options granted (regardless of vesting); (4) options reserved but not granted (option pool); (5) outstanding warrants; (6) SAFE/note conversions (at lower of cap or financing price). The fully-diluted denominator is the foundation for ownership percentage calculations. Different parties define "fully diluted" differently, some include only outstanding options, others include reserved pool. Definition matters for valuation negotiations. SAFE and convertible note conversion modeling SAFEs and convertible notes complicate cap table analysis: (1) SAFE conversion , at next qualified financing; conversion price = lower of cap price or financing price; (2) convertible note conversion , same as SAFE plus accrued interest; (3) scenario modeling , at various financing prices, what percentage do SAFE/note holders receive? (4) cap table impact , SAFEs and notes can substantially dilute existing stockholders at conversion. Sophisticated cap table software supports SAFE/note scenario modeling automatically. The option pool refresh At each financing round, option pool is typically "refreshed" to maintain target pool size (typically 10-20% of fully-diluted post-money). The refresh creates additional dilution: (1) pre-money pool refresh , dilutes existing stockholders only; investor-favorable; (2) post-money pool refresh , dilutes both existing stockholders and new investor; founder-favorable. Option pool sizing and timing is heavily negotiated and substantially affects founder dilution. Cap table software Modern cap table management typically uses specialized software: (1) Carta , market leader, comprehensive; substantial cost; (2) Pulley , competitive alternative with lower cost; (3) AngelList Cap Table , bundled with AngelList investor services; (4) spreadsheet , simple companies; manual maintenance. Cap table software provides: scenario modeling, option grants, SAFE/note tracking, investor reporting, transfer agent services. Most VC-backed companies use cap table software at Series A and later. Cap table maintenance discipline Cap table accuracy requires ongoing discipline: (1) document all share issuances , board resolutions, stock certificates, transfer ledger; (2) document all option grants , board approval, grant agreements, vesting schedules; (3) track SAFE/note issuance ; (4) update for option exercises ; (5) update for transfers , secondary sales, gifts, divorce, death; (6) periodic reconciliation , quarterly or as-needed; (7) diligence preparation , clean cap table is foundational to any transaction. Cap table errors discovered during M&A diligence can delay or kill deals. Practical context For Texas startups, cap table discipline is foundational. Best practice: (1) maintain cap table from incorporation, even pre-revenue companies should have proper cap table; (2) use cap table software at first VC round (or earlier); (3) document all issuances with board resolutions and stock certificates; (4) reconcile regularly, quarterly minimum; (5) before any financing round, prepare clean cap table with all SAFE/note conversions modeled; (6) update for option exercises promptly; (7) maintain backup documentation, option grants, board minutes, transfer documents. For founders: (1) understand cap table impact of every financing decision; (2) model dilution scenarios before signing term sheets; (3) review cap table periodically for errors. For investors: (1) request cap table as part of diligence; (2) verify cap table accuracy through board resolutions and stock certificates; (3) model post-investment cap table including own investment. Common pitfall: cap table errors accumulating over time, small errors at Series A become substantial issues at Series B and beyond. Diligence cleanup is expensive and time-consuming. Related Terms Preferred Stock · SAFE · Convertible Note · Term Sheet · Section 83(b) Election Capital Contribution § Cash, property, services, or promise transferred by a member to a Texas LLC in exchange for a membership interest, or by an existing member in connection with their existing interest. Includes initial contributions at formation and subsequent capital calls. A capital contribution is the cash, property, services, or promise of any of these that a member transfers to a Texas LLC in exchange for a membership interest, or that an existing member transfers in connection with the member's existing interest. The term covers both initial contributions made at formation and subsequent contributions made during the LLC's life (commonly called "capital calls" when required by the company agreement). Authority Tex. Bus. Orgs. Code § 1.002(9) (defining "contribution"); Subchapter D of Chapter 101: § 101.151 (writing requirement); § 101.152 (changed circumstances do not excuse); § 101.153 (consequences of breach); § 101.154 (consent required to release); § 101.155 (creditor's right to enforce). Defining "contribution" Under § 1.002(9) , a contribution is "a tangible or intangible benefit that a person transfers to an entity in consideration for an ownership interest in the entity or otherwise in the person's capacity as an owner or a member." This explicitly includes cash, services rendered, contracts for future services, promissory notes, and property. The writing requirement A promise to make a contribution to a Texas LLC is enforceable only if the promise is (1) in writing, and (2) signed by the person making the promise. § 101.151 . This rule has significant practical consequences: an oral commitment to make a future capital contribution is unenforceable. Members who orally agree to "put in another $100,000 if we need it" cannot be made to honor that commitment over their objection. The capital-contribution provisions of the company agreement itself constitute a writing signed by the member. Changed circumstances do not excuse Under § 101.152 , a member who has made an enforceable promise to contribute is obligated to perform without regard to subsequent death, disability, or other change in personal circumstances. This protects the LLC's reliance on committed capital. Consequences of breach When a member fails to perform an enforceable contribution promise, the LLC may demand cash equal to the agreed value of the unperformed contribution (less any partial performance). § 101.153(a) . Importantly, § 101.153(b) provides a non-exclusive list of consequences that the company agreement may impose for failure to make a required contribution, including reduction or forfeiture of the defaulting member's interest, dilution, conversion, redemption at fair market value or specified price, lending to the defaulting member, sale of the interest, arbitration, or other consequences. This authority is Texas-distinctive. Practical context The interaction of §§ 101.151 and 101.153(b) is the foundation of Texas capital-call practice. Sophisticated company agreements include a written capital-call mechanism identifying triggers, notice, and consequences for failure to fund; an enumerated set of consequences drawing from § 101.153(b) 's permissive list; and clear documentation of each capital call. The most common Texas LLC capital-contribution disputes turn on whether an oral commitment was made, whether the company agreement permits the consequences the LLC seeks to impose, and whether the LLC's records adequately document the agreed value of contributions. Companion article: Raising Capital in Texas Related Terms Limited Liability Company · Member · Membership Interest · Company Agreement · Distribution Certificate of Formation § The public document filed with the Texas Secretary of State to bring a domestic filing entity into legal existence under Texas law. The Texas equivalent of "articles of organization" (LLCs) or "articles of incorporation" (corporations) used in other states. A certificate of formation is the public document filed with the Texas Secretary of State to bring a domestic filing entity (corporation, LLC, limited partnership, professional entity, real estate investment trust, cooperative association) into legal existence under Texas law. It is the Texas equivalent of what other states call "articles of organization" (LLCs) or "articles of incorporation" (corporations), the TBOC harmonized the terminology when it took effect. Authority Tex. Bus. Orgs. Code § 3.001 (formation); § 3.005 (general requirements); §§ 3.007–3.015 (entity-specific supplemental requirements). For LLCs: § 3.010 . Filing procedures: Chapter 4. Texas Secretary of State Form 205 is the standard LLC certificate of formation. Required content Under § 3.005 , every certificate of formation must state: (1) the name of the entity (which must comply with name-availability rules under TBOC Chapter 5); (2) the type of entity being formed; (3) the entity's purpose; (4) the period of duration (perpetual unless the certificate provides otherwise, § 3.003 ); (5) the registered agent and registered office in Texas; (6) the initial mailing address of the entity (required for filings on or after January 1, 2022); and (7) the name and address of each organizer. For an LLC, § 3.010 also requires the certificate to state whether the LLC initially has managers and the names and addresses of the initial managers or members. Effectiveness Under §§ 4.052 and 4.053 , a certificate of formation generally becomes effective when filed by the Texas Secretary of State, but the filer may delay effectiveness to a specified date or time (up to 90 days from signing) or condition effectiveness on the occurrence of a future event. Filing fee $300 for LLCs and for-profit corporations, payable to the Texas Secretary of State. § 4.151 . Who may sign Effective June 1, 2022, Tex. Bus. Orgs. Code § 101.0515 requires LLC filing instruments to be signed by an authorized officer, manager, or member of the LLC. This restricts the prior practice under which an attorney or other agent could sign formation documents. Amendment and restatement Certificates of formation may be amended (Subchapter B of Chapter 3) or restated ( §§ 3.060, 3.061, 3.0611 ). A 2024 amendment to § 3.0611 permits a restated LLC certificate to omit historical information about prior managers or members. Practical context The certificate of formation is the public face of the LLC. It is what banks, vendors, counterparties, and litigants see when they search the Secretary of State's records. Most substantive governance, voting, distributions, transfers, dissolution, lives in the company agreement, which is private. The certificate's role is narrower: legal existence, name protection, registered agent for service of process, and the basic management structure. When the public certificate and the private company agreement conflict, the company agreement controls under § 101.052(d) , except where § 101.054 makes the certificate's terms non-waivable. Effective May 14, 2025, SB 29 amended § 2.115 and added § 2.116 to permit the certificate of formation (or alternatively the bylaws or other governing document) to include enforceable exclusive-forum clauses and jury-waiver provisions, making the certificate a more strategic governance document than it was before May 2025. Companion article: Starting a Business in Texas Related Terms Limited Liability Company · Company Agreement · Bylaws · Corporation · Texas Business Organizations Code Chapter 11 (Reorganization) § Bankruptcy proceeding under 11 U.S.C. §§ 1101-1195 in which a business (or individual) reorganizes its debts and operations under court supervision while continuing to operate. The debtor typically remains in possession (DIP) and proposes a Plan of Reorganization for creditor and court approval. Common for businesses with viable operations facing financial distress. The 2019 Small Business Reorganization Act added Subchapter V, streamlined Chapter 11 for small businesses (debt limit $7.5M post-CARES, with periodic adjustments). Chapter 11 is the bankruptcy proceeding in which a business reorganizes its debts and operations under court supervision while continuing to operate. The debtor typically remains in possession (DIP, debtor-in-possession) rather than having a trustee appointed, and proposes a Plan of Reorganization for creditor and court approval. Chapter 11 is the principal bankruptcy framework for businesses with viable operations facing financial distress, providing breathing space, cramdown ability against dissenting creditors, contract rejection authority, and DIP financing access. Subchapter V (added 2019) provides streamlined Chapter 11 for small businesses. Authority Federal statute: 11 U.S.C. §§ 1101-1195 . DIP framework: § 1107 . Plan provisions: § 1123 . Plan confirmation: § 1129 . Cramdown: § 1129(b) . Subchapter V (small business): §§ 1181-1195 (Small Business Reorganization Act of 2019). Debt limit for Subchapter V: $7.5M (CARES Act expansion; periodic adjustments). Foundational cases: NLRB v. Bildisco , 465 U.S. 513 (1984) (collective bargaining); Stern v. Marshall , 564 U.S. 462 (2011) (constitutional limits on bankruptcy court jurisdiction). Debtor-in-possession In Chapter 11, the debtor typically remains in possession with management authority, operating the business as fiduciary for creditors. Section 1107 grants DIP the rights, powers, and duties of a trustee (with limited exceptions). DIP responsibilities: (1) operate business consistent with fiduciary duties; (2) provide reporting to creditors and US Trustee; (3) avoid preferential and fraudulent transfers; (4) exercise business judgment in routine matters; (5) seek court approval for non-ordinary-course transactions. Trustee appointment occurs only for cause (fraud, dishonesty, gross mismanagement, incompetence). Exclusive plan period Section 1121 grants debtor 120-day exclusive period to propose a plan (extendable by court up to 18 months from petition); 180-day exclusive period to obtain plan acceptance (extendable up to 20 months). After exclusivity expires, any party in interest may file competing plan. Exclusivity gives debtor leverage in plan negotiations; competing plans often signal failed reorganization. Most successful Chapter 11s confirm plan during exclusivity period. Plan confirmation requirements Section 1129 imposes plan confirmation requirements: (1) good faith ; (2) compliance with Chapter 11 provisions ; (3) feasibility , plan likely to succeed; (4) best interests test , each creditor receives at least as much as in Chapter 7 liquidation; (5) fair and equitable for non-consenting classes; (6) at least one impaired class consents ; (7) absolute priority rule , unless cramdown exception applies, equity receives nothing if creditors not paid in full. Confirmation requires substantial plan-development work; many cases convert to Chapter 7 after failed plan attempts. Cramdown, § 1129(b) Cramdown allows confirmation over dissenting class objections if plan is "fair and equitable" to the dissenting class. Standards vary by claim type: (1) secured creditors , retain liens plus deferred cash payments equal to allowed claim, OR sale of collateral with lien attaching to proceeds, OR indubitable equivalent; (2) unsecured creditors , paid in full, OR junior classes receive nothing (absolute priority); (3) equity , paid in full, OR no junior class receives or retains anything. Cramdown is powerful but technical; sophisticated cases involve substantial cramdown analysis. Subchapter V, small business stream Small Business Reorganization Act of 2019 added Subchapter V for small business debtors. Key features: (1) debt limit , $7.5M (originally $2.7M; CARES Act expanded to $7.5M; expanded threshold has been periodically extended); (2) no creditor committee typically; (3) trustee appointed with limited role (oversight, distribution); (4) no absolute priority rule , equity can retain ownership without paying creditors in full; (5) shorter timeline , 90-day plan filing deadline (vs. 120 days standard); (6) debtor-only plan filing ; (7) cramdown based on disposable income over 3-5 years. Subchapter V dramatically reduces Chapter 11 cost and complexity for small businesses. Common Chapter 11 outcomes Chapter 11 outcomes: (1) confirmed plan , successful reorganization; debtor emerges with restructured debt; (2) 363 sale , sale of substantially all assets to going concern buyer; common in distressed M&A; (3) conversion to Chapter 7 , failed reorganization; trustee liquidation; (4) dismissal , case dismissed if no progress or for cause; (5) structured dismissal , negotiated dismissal with creditor distributions outside plan. Many filings are pre-arranged or pre-packaged with substantial creditor agreement before petition filing. Practical context For Texas businesses considering Chapter 11, planning before filing is critical. Best practice: (1) engage experienced bankruptcy counsel and financial advisor pre-petition; (2) prepare 13-week cash flow forecast and DIP financing strategy; (3) identify executory contracts to assume or reject; (4) develop reorganization plan thesis before filing; (5) for small businesses (debt under $7.5M), evaluate Subchapter V eligibility, substantially less expensive; (6) consider pre-packaged or pre-arranged Chapter 11 with creditor agreements; (7) for distressed M&A, evaluate 363 sale strategy. For creditors: (1) file proof of claim timely; (2) participate in creditor committee where appointed; (3) evaluate plan treatment carefully; (4) preserve rights through stay relief motions where appropriate. Related Terms Chapter 7 · Debtor-in-Possession · Section 363 Sale · Plan of Reorganization · Automatic Stay Chapter 13 (Individual Reorganization) § Bankruptcy proceeding under 11 U.S.C. §§ 1301-1330 available to individuals with regular income, providing for repayment of debts over 3-5 years through court-approved plan. Allows debtor to retain assets (including non-exempt property) by paying value over plan term. Subject to debt limits (currently approximately $2.75M total per debtor). Common in mortgage cure situations, tax debts, and where Chapter 7 not available (means test failure) or undesirable. Chapter 13 is the bankruptcy proceeding available to individuals with regular income, providing for repayment of debts over 3-5 years through a court-approved plan. Chapter 13 allows debtors to retain assets (including non-exempt property) by paying value over the plan term, distinguishing it from Chapter 7 where non-exempt assets are liquidated. Chapter 13 is common in mortgage cure situations, tax debt repayment, and where Chapter 7 is not available (above-median income) or undesirable (asset retention). Authority Federal statute: 11 U.S.C. §§ 1301-1330 . Eligibility: § 109(e) . Plan: § 1322 . Confirmation: § 1325 . Discharge: § 1328 . Debt limits: approximately $2.75M total (combined secured and unsecured; periodic adjustments). Trustee role: § 1302 . Eligibility, § 109(e) Chapter 13 eligibility requires: (1) individual (or individual with spouse), no entities; (2) regular income , sufficient to fund plan payments; (3) debt limits , combined secured and unsecured debts under approximately $2.75M (periodic adjustments). The debt limit is important: high-debt individuals may need Chapter 11 instead. Individuals filing jointly with spouse can use combined income but must satisfy combined debt limits. Plan structure Chapter 13 plan must provide: (1) plan term , 3 years (below-median income) or 5 years (above-median income); (2) full payment of priority claims , taxes, domestic support, certain other priority debts; (3) secured creditor treatment , typically retain liens with payment of value over plan term; (4) unsecured creditor treatment , at minimum, what they would receive in Chapter 7 (best interests test); often pro rata of disposable income; (5) regular payments , typically monthly to trustee. Plan administered by Chapter 13 trustee. Common uses Chapter 13 typical scenarios: (1) mortgage cure , paying back arrears over plan term while resuming current payments; (2) tax debt repayment , priority tax debts paid over 3-5 years; (3) above-median income debtors not eligible for Chapter 7; (4) asset retention , protecting non-exempt assets from liquidation; (5) second mortgage stripping , voiding wholly underwater junior liens; (6) protection of co-debtor on consumer debts (§ 1301 codebtor stay). Many filings combine multiple goals. Discharge, § 1328 Chapter 13 discharge issued after completion of plan payments. Discharge is broader than Chapter 7, covers some debts non-dischargeable in Chapter 7 (so-called "superdischarge"). Excluded from Chapter 13 discharge: (1) certain priority taxes; (2) domestic support obligations; (3) certain student loans; (4) drunk-driving liability; (5) criminal restitution; (6) debts incurred through fraud (with limitations). Hardship discharge available where plan completion impossible due to circumstances beyond debtor's control. Conversion and dismissal Chapter 13 cases can be converted or dismissed: (1) conversion to Chapter 7 , debtor right or for cause; common when plan completion impossible; (2) dismissal , for cause including failure to make payments, failure to file plan; (3) conversion to Chapter 11 , rare; for above debt-limit situations. Chapter 13 has high failure rate, substantial percentage of plans never complete due to circumstances changing during plan term. Practical context For Texas individual debtors, Chapter 13 vs. Chapter 7 election depends on income, asset profile, and goals. Best practice: (1) consult experienced bankruptcy counsel, strategy substantially affects outcomes; (2) develop realistic budget supporting plan payments, many plans fail due to optimistic budgeting; (3) coordinate with mortgage cure where applicable; (4) understand 3 vs. 5 year commitment based on income; (5) maintain payment discipline, missed payments lead to dismissal or conversion. For creditors: (1) file proof of claim timely; (2) review plan for proper treatment of claim; (3) object to unfair plan provisions; (4) monitor plan performance. Related Terms Chapter 7 · Chapter 11 · Automatic Stay · Nonjudicial Foreclosure · Priority Chapter 7 (Liquidation) § Bankruptcy proceeding under 11 U.S.C. §§ 701-784 in which a court-appointed trustee liquidates the debtor's non-exempt assets and distributes proceeds to creditors. Available to individuals (subject to means test) and business entities. For individuals, typically results in discharge of qualifying debts. For business entities, typically results in dissolution. The most common form of business bankruptcy for entities without viable reorganization path. Means test under § 707(b) limits individual eligibility. Chapter 7 is the bankruptcy proceeding in which a court-appointed trustee liquidates the debtor's non-exempt assets and distributes proceeds to creditors. Chapter 7 is available to individuals (subject to means test) and business entities. For individuals, Chapter 7 typically results in discharge of qualifying pre-petition debts after liquidation. For business entities, Chapter 7 typically results in dissolution, the entity ceases to exist after asset distribution. Chapter 7 is the most common bankruptcy form: faster and less complex than Chapter 11, but providing no reorganization opportunity. Authority Federal statute: 11 U.S.C. §§ 701-784 . Means test: § 707(b) . Individual exemptions: § 522 . Texas exemptions (state alternative): Tex. Prop. Code §§ 41.001-42.005 . Discharge: § 727 (Chapter 7-specific); § 523 (non-dischargeable debts). Trustee duties: § 704 . Texas homestead exemption (potentially unlimited): Tex. Const. art. XVI, § 50 . The means test The means test (§ 707(b)) limits individual Chapter 7 eligibility based on income: (1) median income comparison , debtor's current monthly income compared to state median; below median typically qualifies; (2) disposable income calculation , for above-median debtors, calculation determines available income for Chapter 13 plan; if above thresholds, Chapter 7 may be presumed abusive; (3) presumption rebuttal , debtor can rebut presumption with special circumstances. Above-median debtors often required to use Chapter 13 instead. Business entities (corporations, LLCs) face no means test. The trustee role Court-appointed Chapter 7 trustee: (1) takes possession of non-exempt assets; (2) liquidates assets, sales, auctions, recovery of preferences and fraudulent transfers; (3) reviews and objects to claims; (4) distributes proceeds per priority scheme. The trustee receives compensation as percentage of distributed assets. Trustees aggressively pursue avoidable transfers, undisclosed assets, and recovery actions to maximize estate value. Texas exemptions Individual debtors can elect federal or state exemptions; Texas exemptions are typically more favorable: (1) homestead , potentially unlimited value (subject to acreage limits: 10 acres urban, 100/200 rural); (2) personal property , up to $100K/$50K (family/individual) for specified categories; (3) retirement accounts , fully exempt; (4) life insurance and annuities , generally exempt; (5) tools of trade ; (6) specified personal items . Texas's homestead exemption is among the most generous in the nation, making Texas a debtor-favorable jurisdiction. Discharge, § 727 and § 523 For individuals, Chapter 7 discharge releases dischargeable pre-petition debts: (1) § 727 denials, fraud, concealment, false oath, failure to keep records; (2) § 523 non-dischargeable categories, taxes within specified periods, fraud-induced debts, domestic support, willful and malicious injury, certain student loans, drunk-driving liability, criminal restitution. Most consumer debt (credit cards, medical, unsecured) is discharged. Secured debts continue against collateral. Business entities do not receive discharge, they cease to exist. Priority distribution Chapter 7 proceeds distributed per § 507 priorities: (1) secured creditors , to extent of collateral value; (2) administrative expenses , trustee fees, professional fees; (3) priority unsecured , domestic support, certain employee wages, certain taxes; (4) general unsecured , pro rata distribution; (5) subordinated claims ; (6) equity , only after all creditors paid in full (rare). Most general unsecured creditors receive small recovery (cents on the dollar); equity receives nothing in most cases. Practical context For Texas debtors, Chapter 7 vs. Chapter 13 election depends on income, assets, and goals. Best practice: (1) consult experienced bankruptcy counsel before filing, strategy matters substantially; (2) for individuals, evaluate means test eligibility; (3) elect Texas vs. federal exemptions based on asset profile (Texas homestead favors home owners; federal exemptions more generous for some personal property); (4) avoid pre-bankruptcy planning that constitutes fraud or preference; (5) file all required schedules and statements completely. For creditors: (1) file proof of claim timely; (2) attend § 341 meeting of creditors; (3) consider non-dischargeability claims under § 523 where applicable; (4) monitor trustee actions and case progress. Related Terms Chapter 11 · Chapter 13 · Automatic Stay · Workout and Restructuring · Priority Charging Order § A court order entitling a judgment creditor to receive any distributions that would otherwise be paid to a debtor-member of an LLC, partner of a limited partnership, or partner of a general partnership. The exclusive remedy under Texas law for satisfying a personal judgment out of the debtor's interest in the entity. A charging order is a court order entitling a judgment creditor to receive any distributions that would otherwise be paid to a debtor-member of an LLC, partner of a limited partnership, or partner of a general partnership. The charging order constitutes a lien on the debtor's interest but conveys no governance rights and cannot be foreclosed. Authority Three parallel TBOC provisions: Tex. Bus. Orgs. Code § 101.112 (LLCs); § 153.256 (limited partnerships); § 152.308 (general partnerships). Mechanics On application by a judgment creditor of a member or partner, a Texas court with jurisdiction may charge the debtor's interest in the entity to satisfy the judgment. The creditor's rights are limited to receiving distributions the debtor would otherwise have received. The lien created by the order may not be foreclosed under Texas law or any other law. The creditor obtains no right to participate in management, no right to access entity property, and no right to compel distributions. The Texas exclusivity rule This is the feature that distinguishes Texas charging order law from many other states. Each of §§ 101.112 , 153.256 , and 152.308 expressly provides that the entry of a charging order is the exclusive remedy by which a judgment creditor may satisfy a judgment out of the debtor's interest. The creditor cannot foreclose on the membership or partnership interest, force a sale of the interest, obtain a court order dissolving the entity, or exercise any legal or equitable remedy against the entity's property to satisfy the personal debt of a member or partner. Texas applies this exclusivity rule equally to single-member LLCs and multi-member LLCs, a notable departure from many other states. Boundaries of exclusivity Texas courts have addressed whether the exclusivity rule reaches distributions after they have been paid out. In Stanley v. Reef Securities, Inc. and Goodman v. Compass Bank , Texas courts held that once a distribution is made and is in the debtor's possession, it ceases to be the debtor's "partnership interest" and becomes personal property reachable by ordinary collection mechanisms (such as a turnover order under Tex. Civ. Prac. & Rem. Code § 31.002 ). The exclusivity rule protects the interest itself, not money already in the debtor's hands. Practical context The charging order regime is the foundation of Texas-specific asset-protection planning for owners of closely-held businesses, real estate holding companies, and family limited partnerships. The combination of LLC liability shields and charging-order exclusivity makes Texas one of the strongest debtor-friendly jurisdictions in the United States for protecting interests in entity ownership from personal creditors. Related Terms Limited Liability Company · Member · Membership Interest Choice of Law / Choice of Forum § Choice of law clauses specify which jurisdiction's substantive law governs a contract. Choice of forum (forum selection) clauses specify the courts authorized to hear disputes. Both are foundational for commercial contracts involving multi-state parties or transactions. Choice of law clauses specify which jurisdiction's substantive law governs the interpretation and enforcement of a contract. Choice of forum (or "forum selection") clauses specify the courts or arbitral tribunals authorized to hear disputes arising from the contract. Both clause types are foundational to commercial contracts, particularly those involving parties or transactions in multiple states. Authority Choice of law: DeSantis v. Wackenhut Corp. , 793 S.W.2d 670 (Tex. 1990) (Texas approach). Restatement (Second) Conflict of Laws § 187 . Choice of forum: In re AIU Insurance Co. , 148 S.W.3d 109 (Tex. 2004); Tex. Civ. Prac. & Rem. Code § 15.020 (mandatory venue for major transactions exceeding $1,000,000). Choice of law enforceability Under DeSantis , Texas courts generally enforce contractual choice-of-law clauses if (1) the chosen jurisdiction has a substantial relationship to the parties or the transaction, or there is another reasonable basis for the parties' choice; and (2) application of the chosen law would not be contrary to a fundamental policy of a state with a materially greater interest. The "fundamental policy" exception is invoked sparingly, most commercial choice-of-law clauses are enforced as written. Choice of forum enforceability Forum selection clauses are presumptively enforceable under Texas law. Mandatory forum clauses (specifying that disputes "shall" be litigated in a specific court) are enforced unless the resisting party shows the clause is unreasonable, fraud-induced, or contrary to public policy. Permissive forum clauses (specifying that a court "may" hear disputes) preserve party rights to litigate elsewhere. Tex. Civ. Prac. & Rem. Code § 15.020 For "major transactions" (consideration exceeding $1 million), parties may by contract designate any Texas county as the mandatory venue. The statute overrides ordinary venue rules for qualifying contracts. Practical context Choice-of-law and forum clauses are critical for predictability, they fix in advance the substantive rules and procedural setting that will apply to disputes. Sophisticated drafting addresses (1) substantive law selection; (2) exclusive vs. non-exclusive forum; (3) whether the clause covers tort claims arising from the contract relationship, not just breach; (4) carve-outs for injunctive relief in any jurisdiction. Companion article: Contract Disputes in Texas Related Terms Sale of Goods · Master Service Agreement · Statute of Frauds Civil Conspiracy § A theory of vicarious liability in tort under which two or more persons who agree to accomplish an unlawful purpose, or a lawful purpose by unlawful means, become jointly and severally liable for the resulting harm. Texas treats civil conspiracy as a derivative tort, there must be an underlying tort that one of the conspirators committed; conspiracy alone is insufficient. The Texas Supreme Court reaffirmed this framework in Agar Corp. v. Electro Circuits International, LLC, 580 S.W.3d 136 (Tex. 2019). Civil conspiracy is a theory of vicarious liability under which persons who agree to accomplish an unlawful purpose (or a lawful purpose by unlawful means) become jointly and severally liable for the harm that results. The doctrine extends liability for an underlying tort beyond the direct tortfeasor to co-conspirators who participated in the planning even if they did not personally commit the wrongful act. Texas treats civil conspiracy as a derivative tort, there must be a viable underlying tort, and one of the conspirators must have committed it. Authority Foundational Texas case: Massey v. Armco Steel Co. , 652 S.W.2d 932 (Tex. 1983) (five-element civil-conspiracy framework). Modern reaffirmation: Agar Corp., Inc. v. Electro Circuits Int'l, LLC , 580 S.W.3d 136 (Tex. 2019) (civil conspiracy is a derivative claim; statute of limitations runs from the underlying tort, not separately). Other key cases: Tilton v. Marshall , 925 S.W.2d 672 (Tex. 1996); Triplex Communications, Inc. v. Riley , 900 S.W.2d 716 (Tex. 1995). Federal counterpart: 42 U.S.C. § 1985 (civil rights conspiracy, distinct doctrine with its own framework). The five elements Massey v. Armco Steel articulates the five elements of civil conspiracy: (1) two or more persons ; (2) an object to be accomplished ; (3) a meeting of the minds on the object or course of action ; (4) one or more unlawful, overt acts ; and (5) damages as the proximate result . The "meeting of the minds" element requires more than parallel conduct or shared interests, proof of an actual agreement, express or tacit, to engage in the conduct. The derivative-tort requirement Agar Corp. v. Electro Circuits International (Tex. 2019) is the controlling modern statement of the derivative-tort doctrine. The Texas Supreme Court held that civil conspiracy is not a stand-alone cause of action but a derivative one, recovery requires (1) a viable underlying tort that one of the conspirators committed; and (2) participation by the alleged co-conspirator in the agreement to commit it. If the underlying tort fails (because of statute of limitations, immunity, lack of duty, etc.), the conspiracy claim fails with it. Agar also confirmed that the limitations period for conspiracy runs from the underlying tort's accrual, not from the conspiracy as a separate cause of action. Common applications Texas civil-conspiracy claims typically attach to: (1) fraud , co-conspirators in a scheme to defraud; (2) tortious interference , multiple parties coordinating to interfere with a business relationship; (3) misappropriation of trade secrets ; (4) conversion ; (5) fraudulent transfers in commercial litigation; (6) breach of fiduciary duty , claims against third parties who knowingly assist a fiduciary in breaching duty. The claim is particularly valuable when the direct tortfeasor is judgment-proof or unavailable but co-conspirators have assets. The "intracorporate conspiracy" doctrine Texas applies a limited form of the "intracorporate conspiracy" doctrine: agents of a single corporation generally cannot conspire with the corporation itself or with each other when acting within the scope of their corporate duties. Multiple-defendant civil-conspiracy claims that name only a corporation and its officers are vulnerable to dismissal unless the plaintiff can plead conduct outside the scope of corporate duties or involving non-corporate actors. The doctrine is narrower than its federal antitrust counterpart but operates similarly in many cases. Pleading standards Texas pleading standards for civil conspiracy require specific allegations: (1) identifying the parties to the agreement; (2) describing the meeting of the minds with sufficient specificity; (3) tying the conspiracy to a viable underlying tort; (4) alleging the overt act and proximate causation. Conclusory allegations of "conspiring" or "acting in concert" are insufficient. Federal courts applying Texas law in diversity have applied the same particularity requirements; vague conspiracy allegations are routinely dismissed under Rule 12(b)(6) or Rule 91a. Practical context For Texas commercial plaintiffs, civil conspiracy is most valuable when the direct tortfeasor is judgment-proof or has fled, but co-conspirators with assets remain available. Best practice: (1) confirm the underlying tort is viable before pleading conspiracy, failure of the underlying tort is fatal; (2) plead the meeting of the minds with specificity; (3) avoid intracorporate-conspiracy traps by including non-corporate or extra-corporate-scope conduct; (4) calendar limitations from the underlying tort, not separately. For defendants, the principal defenses are (1) attacking the underlying tort; (2) invoking intracorporate conspiracy; (3) challenging the meeting-of-the-minds element on parallel-conduct grounds; (4) statute-of-limitations on the underlying tort. Related Terms Tortious Interference · Fiduciary Duty · Statute of Limitations · Sanctions · Trade Secret Class Voting / Series Voting § 2025 The requirement that holders of a particular class or series of shares vote separately, as a class, on a specified matter. Substantially modified by SB 29 effective May 14, 2025, permitting Texas corporations to waive class and series voting in their certificates of formation. Class voting (or series voting) is the requirement that the holders of a particular class or series of shares vote separately, as a class, on a specified matter. Where class voting is required, the matter must be approved by both the corporation's overall shareholder vote and the separate vote of each affected class, giving each class effective veto power over actions that disproportionately affect it. Authority Tex. Bus. Orgs. Code §§ 21.364, 21.365 (vote required for fundamental actions); § 21.457 (class voting on mergers); § 21.4571 (additional class voting matters); § 21.364(d)(1) , as amended by SB 29 effective May 14, 2025. The pre-SB 29 default Before May 14, 2025, Texas required separate class or series voting for any "fundamental action" or "fundamental business transaction" affecting the class, including changes in authorized shares, mergers, conversions, and sales of substantially all assets. This produced significant transaction friction for venture-backed corporations with multiple preferred-stock series. The SB 29 change (eff. May 14, 2025) Under amended § 21.364(d)(1) , Texas corporations may now waive separate class and series voting in their certificate of formation for any matter, including fundamental business transactions. The waiver may also extend to the increase or decrease of authorized shares of a class or series (subject to a floor at the number of outstanding shares of the class or series). § 21.364(d)(1) . Strategic significance This change closes a long-standing gap between the TBOC and Delaware General Corporation Law § 242(b)(2) . For venture-backed Texas corporations with multiple preferred-stock series, each with differing economic incentives in an acquisition scenario, the elimination of mandatory class voting reduces transactional veto risk and accelerates deal closings. Practical context The waiver requires affirmative election in the certificate of formation; existing Texas corporations seeking the benefit must amend their certificates. The waiver is most relevant for venture-stage, growth-stage, and pre-IPO Texas corporations with complex preferred-stock structures. Closely-held corporations with single-class structures are unaffected. Companion article: Raising Capital in Texas Related Terms Voting · Shareholder · Corporation · Certificate of Formation · Merger Click-Wrap Agreement § An online contract formation method in which the user manifests assent by clicking an "I agree" button or checkbox after being presented with the contract terms. The most enforceable of the online contract types under both Texas and federal law. A click-wrap (or "click-through") agreement is an online contract formation method in which the user manifests assent to a set of contractual terms by taking an affirmative action, typically clicking an "I agree" button or checking a box, after being presented with the terms. Click-wrap is the most reliably enforceable of the three principal online contract types in Texas: click-wrap, browsewrap, and sign-in-wrap. Authority Texas Uniform Electronic Transactions Act (UETA), Tex. Bus. & Com. Code Ch. 322 , including § 322.007 (legal effect of electronic records and signatures). Federal Electronic Signatures in Global and National Commerce Act (E-SIGN), 15 U.S.C. § 7001 et seq. Foundational case: Specht v. Netscape Communications Corp. , 306 F.3d 17 (2d Cir. 2002) (Sotomayor, J.) (browsewrap unenforceable absent reasonable notice; click-wrap enforceable). Texas application: Recursion Software, Inc. v. Interactive Intelligence, Inc. , 425 F. Supp. 2d 756 (N.D. Tex. 2006). Click-wrap vs. browsewrap vs. sign-in-wrap Click-wrap requires an affirmative user action (clicking "I agree") in response to displayed terms. Browsewrap purports to bind the user merely by browsing the site, with terms accessible by hyperlink. Sign-in-wrap occupies a middle ground: the user clicks a sign-in or registration button while terms are referenced near the button. Browsewrap is presumptively unenforceable; sign-in-wrap is fact-intensive and depends on the conspicuousness of the notice and the physical proximity of the terms to the assent action. Texas enforceability requirements Texas courts apply general contract principles plus UETA. The user must have (1) reasonable notice of the existence of the terms; (2) an opportunity to review the terms; and (3) manifested unambiguous assent. The terms-of-service hyperlink should be visually distinct (typically blue or underlined) and adjacent to the assent button. The button text or proximity language should explicitly reference assent (e.g., "By clicking Sign Up, you agree to our Terms of Service"). Common drafting failures Terms hidden in footers, presented only after assent, displayed in low-contrast colors, or accessible only via a non-conspicuous hyperlink reduce enforceability. Material modifications to the terms require fresh notice and assent. Arbitration clauses, class-action waivers, and forum selection clauses receive heightened scrutiny when buried in click-wrap that fails the reasonable-notice test. Practical context Texas businesses operating any consumer-facing website, app, or SaaS portal should use click-wrap rather than browsewrap. The marginal UX cost is small; the legal certainty gain is substantial. Click-wrap is essentially mandatory for arbitration clauses, class-action waivers, and broad indemnification provisions to survive enforcement challenges. Related Terms Software License Agreement · End User License Agreement · SaaS Agreement · Consideration · Statute of Frauds Closely Held Corporation § A Texas for-profit corporation defined by TBOC § 21.563(a) as having fewer than 35 shareholders and no public market for its shares. Triggers significant procedural advantages for shareholders pursuing derivative claims. A "closely held corporation" is a Texas for-profit corporation defined by TBOC § 21.563(a) as a corporation that has (i) fewer than 35 shareholders and (ii) no shares listed on a national securities exchange or regularly quoted in an over-the-counter market. The closely held corporation is not a separate corporate form, it is a statutory category that triggers procedural and substantive advantages for shareholders pursuing derivative claims. Authority Tex. Bus. Orgs. Code § 21.563 (definition and procedural advantages); §§ 21.701–21.763 (close corporation form, distinct concept); § 101.463 (LLC parallel); Sneed v. Webre , 465 S.W.3d 169 (Tex. 2015); Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014). Distinguishing "closely held" from "close corporation" Texas law uses two distinct terms that are easily confused: Close corporation (Subchapter O of Chapter 21, §§ 21.701–21.763 ). A specific corporate form that a Texas corporation may elect by statement in the certificate of formation. Election enables management directly by shareholders without a board, through a shareholders' agreement under § 21.713 . Opt-in regime requiring formal election. Closely held corporation ( § 21.563 ). A statutory category triggered automatically by meeting size and market criteria. No election required. A Texas corporation may be both, either, or neither. The terms are not interchangeable. The § 21.563 derivative-action advantages No demand requirement. The 91-day written-demand procedure of § 21.553 does not apply. Sneed v. Webre , 465 S.W.3d at 178. No dismissal-by-independent-committee. The committee-dismissal mechanism of § 21.555 does not apply. Direct recovery available. § 21.563(c) permits the court to order recovery to be paid directly to plaintiff shareholders rather than to the corporation if "justice requires." Attorney's fees recoverable. § 21.561(b) permits recovery of legal fees from defendants where the suit provided substantial benefit. The post-Ritchie significance Ritchie v. Rupe substantially narrowed minority shareholder protections by eliminating the common-law oppression cause of action. The Texas Supreme Court in Sneed v. Webre emphasized that the closely held corporation derivative-action procedure under § 21.563 is the principal mechanism through which minority shareholders may seek meaningful relief. Sneed also held that a shareholder of a closely held parent corporation may bring a "double-derivative" suit on behalf of the parent's wholly owned subsidiary against the subsidiary's officers and directors. LLC parallel, § 101.463 Texas LLC law contains a substantially parallel provision: an LLC qualifies for derivative-action advantages if it has fewer than 35 members and no public market. SB 29 implications The 2025 SB 29 corporate-governance reforms generally do not apply automatically to closely held corporations. The codified business judgment rule under § 21.419 , the 3% derivative-action ownership threshold under § 21.552(a)(3) , and related amendments apply by default only to publicly-traded corporations. A closely held corporation may opt into these protections, but doing so subjects the corporation to the more director-and-officer-protective regime, generally not in the interest of minority shareholders. Practical context The closely held corporation is the dominant form of small-to-medium Texas business that uses corporate (rather than LLC) form. The procedural advantages of § 21.563 are substantial enough that minority shareholders of Texas closely held corporations have meaningfully better protection than minority shareholders of publicly-traded Texas corporations. This produces a counterintuitive result: shareholders of small Texas corporations have stronger derivative-action protections than shareholders of large Texas corporations, by design. Companion article: Starting a Business in Texas Related Terms Corporation · Shareholder · Director · Derivative Action · Shareholder Oppression · Limited Liability Company · Business Judgment Rule Closing Conditions § The events, deliveries, and circumstances that must be satisfied (or waived by the benefited party) before either party is obligated to close an M&A transaction. Allocates signing-to-closing risk and provides termination rights when conditions fail. Closing conditions are the specific events, deliveries, and circumstances that must be satisfied (or waived by the benefited party) before either party is obligated to close the transaction. The closing conditions allocate signing-to-closing risk and provide each party with specific termination rights when conditions fail. Authority No statutory authority, closing conditions are creatures of contract. Standard buyer conditions (1) Bring-down of seller representations (reps remain true at closing, subject to materiality qualifiers); (2) compliance with covenants; (3) absence of MAC; (4) third-party consents and regulatory approvals; (5) delivery of specific documents (good standing certificates, secretary's certificates, opinions of counsel); (6) financing condition (rare in middle-market deals; common in highly-leveraged transactions); (7) employment agreements with key personnel. Standard seller conditions (1) Bring-down of buyer representations; (2) buyer compliance with covenants; (3) regulatory approvals; (4) buyer delivery of purchase price. Mutual conditions (1) Regulatory approvals (HSR, CFIUS, industry-specific approvals); (2) absence of injunctions; (3) consents. Drop-dead date Most agreements include an "outside date" (drop-dead date) by which closing must occur or either party may terminate. Typical: 90 days, sometimes extended for regulatory delays. Materiality qualifiers Reps brought down at closing typically use "in all material respects" or "MAC" qualifiers to prevent the buyer from refusing to close based on trivial inaccuracies. Carefully drafted agreements specify whether existing materiality qualifiers in the reps "double-count" with the bring-down qualifier (typically "no double materiality" provisions exclude double-counting). Practical context Closing conditions are negotiated alongside reps, indemnification, and termination rights as an integrated risk-allocation package. A buyer that gives ground on indemnification often holds firm on closing conditions; a seller that resists strong reps often accepts tighter closing conditions in exchange. Companion article: Selling Your Business in Texas Related Terms Representations and Warranties · Material Adverse Change · Letter of Intent · Indemnification (M&A) COBRA Continuation Coverage § Federal statute (29 U.S.C. § 1161 et seq.) requiring group health plans to offer continuation coverage to qualified beneficiaries who lose coverage due to specified qualifying events. Applies to private employers with 20+ employees and group health plans. Standard continuation: 18 months for termination/reduction in hours; 36 months for divorce, dependent aging out, death, Medicare entitlement. Beneficiary pays full premium plus 2% admin fee (102% of plan cost). COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1985, requires group health plans to offer continuation coverage to qualified beneficiaries who lose coverage due to specified qualifying events. The statute applies to private employers with 20 or more employees offering group health plans. Texas has a "mini-COBRA" or state continuation law covering smaller employers (Tex. Ins. Code Ch. 1251, Subch. F). COBRA continuation provides important bridge coverage for employees and dependents during transitions, though the high cost (typically 102% of plan premium) makes alternatives (ACA marketplace, spouse's coverage) economically attractive in many cases. Authority Federal statute: COBRA, codified at 29 U.S.C. §§ 1161-1169 (ERISA portion); 26 U.S.C. § 4980B (IRC portion); 42 U.S.C. § 300bb-1 et seq. (PHSA for state and local government plans). Coverage threshold: 20+ employees on more than 50% of typical business days in prior calendar year. Texas state continuation: Tex. Ins. Code Ch. 1251, Subch. F . DOL/IRS regulations: 29 C.F.R. § 2590.606 ; 26 C.F.R. § 54.4980B . Qualifying events and coverage periods Standard COBRA qualifying events and corresponding continuation periods: (1) termination of employment (other than gross misconduct), 18 months; (2) reduction in hours below plan eligibility threshold, 18 months; (3) employee's death , 36 months for spouse and dependents; (4) employee's divorce or legal separation , 36 months for spouse and dependents; (5) employee's Medicare entitlement , 36 months for spouse and dependents; (6) dependent child losing dependent status , 36 months. Disability extension: 18-month period extends to 29 months if SSA-determined disability. Multiple qualifying events: subsequent events can extend coverage up to 36 months total. Notice obligations COBRA imposes specific notice obligations: (1) initial general notice , at enrollment in plan, summarizing COBRA rights; (2) employer notice to plan administrator , within 30 days of qualifying events caused by employer (termination, reduction in hours, death, Medicare); (3) employee/dependent notice to plan administrator , within 60 days for qualifying events of which employer may not know (divorce, dependent aging out); (4) election notice , plan administrator to qualified beneficiary within 14 days of receiving qualifying-event notice; (5) election period , qualified beneficiary has 60 days from later of qualifying event or election notice to elect coverage. Failure to provide proper notices can extend election periods and create liability. Premium structure Qualified beneficiaries pay the full cost of coverage plus a 2% administrative fee, typically 102% of the plan's full premium (employee + employer contributions). For disability extension months 19-29, the maximum premium increases to 150%. The high cost relative to actively-employed coverage is a significant economic burden; many qualified beneficiaries decline COBRA coverage and pursue alternatives (ACA marketplace, spouse's employer coverage, Medicaid). Premium payments must be timely; grace periods are limited (30 days standard, with potential reinstatement on timely payment). Common compliance failures Recurring COBRA compliance issues: (1) missed initial notices , failure to provide general notice at plan enrollment; (2) delayed qualifying-event notices ; (3) incorrect election notices , missing required content; (4) premium calculation errors ; (5) termination-letter coordination , separation packets missing COBRA information; (6) HIPAA portability coordination ; (7) FMLA coordination , FMLA leave doesn't trigger COBRA, but expiration without return can; (8) severance coordination , COBRA notices required regardless of employer-paid severance period. Penalties COBRA enforcement carries significant penalties: (1) excise tax , $100 per day per beneficiary per failure (up to $200 per family); annual cap $500K or 10% of plan costs; (2) statutory penalties , up to $110 per day per beneficiary for notice failures; (3) private cause of action ; (4) medical expenses , beneficiaries who incur medical expenses without coverage due to employer failure may recover those expenses; (5) attorney's fees . Practical context For Texas employers with 20+ employees, COBRA compliance is operational rather than strategic, the rules are technical but well-defined. Best practice: (1) integrate COBRA notices into standard onboarding and offboarding processes; (2) work with experienced TPA or plan administrator for notice and election handling; (3) maintain documentation of all COBRA notices sent and received; (4) coordinate with FMLA, severance, and benefits administration; (5) train HR on qualifying events and notice triggers; (6) for smaller employers, evaluate state continuation obligations under Tex. Ins. Code Ch. 1251. For employees: (1) understand election period (60 days from later of qualifying event or election notice); (2) calculate full premium cost vs. ACA marketplace alternatives; (3) preserve documentation of qualifying events and notices. Common gap: separation packets that omit required COBRA election notices. Companion article: Before Firing an Employee Related Terms ERISA · Family and Medical Leave Act · Severance Agreement · WARN Act · Wrongful Termination Collateral § The property subject to a security interest. UCC Article 9 categorizes collateral by type, with different attachment, perfection, priority, and enforcement rules applicable to each category. "Collateral" is the property subject to a security interest. UCC Article 9 categorizes collateral by type, with different attachment, perfection, priority, and enforcement rules applicable to each category. Authority Tex. Bus. & Com. Code § 9.102 (definitions of collateral types); § 9.108 (sufficiency of description); §§ 9.310–9.314 (perfection method varies by collateral type). Principal categories Goods , tangible movable property, subdivided into consumer goods, equipment, farm products, and inventory. Instruments , negotiable instruments and writings evidencing a right to payment of money. Documents , documents of title (warehouse receipts, bills of lading). Chattel paper , records evidencing both a monetary obligation and a security interest in or lease of specific goods. Accounts , rights to payment for goods sold, services rendered, or property licensed. Deposit accounts , accounts maintained with a bank. Investment property , securities, securities accounts, commodity contracts. General intangibles , the residual category, including IP rights, business goodwill, and other intangibles not within other categories. Description requirements (§ 9.108) A description of collateral is sufficient if it reasonably identifies the collateral, including by specific listing, category, type defined in the UCC, quantity, computational formula, or any other method that makes the identity objectively determinable. A "supergeneric" description ("all assets" or "all personal property") is sufficient in a financing statement but not in a security agreement, security agreements require more specific identification. Practical context Collateral category determines perfection method, priority rules, and the secured party's enforcement options. Misclassification of collateral is a common error, mislabeling inventory as equipment, treating a deposit account as cash. Each error has downstream priority consequences. Related Terms Security Interest · Financing Statement · Perfection Commercial General Liability (CGL) Insurance § The standard liability insurance policy for businesses, providing coverage for bodily injury, property damage, personal and advertising injury, and medical payments arising from business operations, premises, and products. Standard ISO form includes Coverage A (bodily injury and property damage), Coverage B (personal and advertising injury), and Coverage C (medical payments). Subject to numerous exclusions including expected/intended injury, contractual liability (with insured-contract exceptions), pollution, employer's liability, and many others. Commercial General Liability (CGL) Insurance is the standard liability insurance policy for businesses. CGL provides coverage for bodily injury, property damage, personal and advertising injury, and medical payments arising from the insured's business operations, premises, and products. Most commercial entities carry CGL as foundational risk protection, often layered with excess and umbrella coverage for higher limits. The standard ISO Commercial General Liability Coverage Form (CG 00 01) is the industry baseline. Authority Standard ISO form: Commercial General Liability Coverage Form (CG 00 01); current edition CG 00 01 (04 13). Texas case law on coverage: Lamar Homes, Inc. v. Mid-Continent Cas. Co. , 242 S.W.3d 1 (Tex. 2007) (defective construction as occurrence); Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co. , 267 S.W.3d 20 (Tex. 2008) (manifestation rule for property damage); Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co. , 279 S.W.3d 650 (Tex. 2009); U.S. Metals, Inc. v. Liberty Mut. Group, Inc. , 490 S.W.3d 20 (Tex. 2015). Insurance Code framework: Tex. Ins. Code Title 5 (consumer protection); Ch. 541 (unfair settlement); Ch. 542 (prompt payment). Coverage structure Standard CGL provides three principal coverages: (1) Coverage A, Bodily Injury and Property Damage Liability : covers liability for "bodily injury" or "property damage" caused by an "occurrence" during the policy period; (2) Coverage B, Personal and Advertising Injury Liability : covers liability for false arrest, malicious prosecution, libel/slander, infringement of copyright/title/slogan, etc.; (3) Coverage C, Medical Payments : provides medical expense payments without regard to fault for injuries occurring on premises or arising from operations. Each coverage has its own insuring agreement, exclusions, and conditions. The "occurrence" requirement Coverage A requires an "occurrence," defined in the standard form as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." Texas courts have interpreted "occurrence" expansively. Lamar Homes v. Mid-Continent (Tex. 2007) held that defective construction can constitute an occurrence, overruling a prior approach that excluded construction defects from coverage. The decision broadened CGL coverage substantially in the construction industry. Subsequent decisions ( Don's Building Supply , U.S. Metals ) have refined the analysis around when "property damage" occurs and the manifestation rule. Common exclusions The standard CGL form contains numerous exclusions: (1) expected or intended injury , injury the insured expected or intended; (2) contractual liability , liability assumed by contract, with significant exceptions for "insured contracts" (which include most commercial indemnification arrangements); (3) liquor liability ; (4) workers' compensation and employer's liability ; (5) employee bodily injury ; (6) pollution ; (7) aircraft, auto, watercraft ; (8) mobile equipment ; (9) war ; (10) damage to property in the insured's care, custody, or control; (11) damage to your product ; (12) damage to your work ; (13) damage to impaired property ; (14) recall of products, work, or impaired property . Each exclusion has a specific scope; coverage analysis often turns on whether an exclusion applies. The "insured contract" exception The contractual liability exclusion (Exclusion B in Coverage A) excludes liability assumed by contract, but with a critical exception for "insured contracts." Insured contracts include leases of premises (with exceptions), sidetrack agreements, easements, contracts with municipalities, indemnification of municipalities, and, most importantly, "any other contract or agreement pertaining to your business" under which the insured assumes the tort liability of another. The insured-contract exception means most commercial indemnification clauses are covered by the underlying CGL despite the contractual liability exclusion, a critical element of how CGL interacts with contractual risk allocation. Texas-specific construction defect doctrine Texas CGL coverage of construction defects is substantially different from many other states. Lamar Homes v. Mid-Continent established that construction defects can be "occurrences" supporting coverage. The decision (and its progeny) addresses subcontractor work, faulty materials, and resulting damage to other property. Coverage typically extends to (1) damage to non-defective property caused by the defective work; (2) bodily injury arising from the defects. Coverage typically does NOT extend to (3) the cost of repair or replacement of the defective work itself (the "your work" exclusion), though subcontractor exception expands coverage in some contexts. Defense duty The CGL insurer has a duty to defend any suit alleging facts that potentially fall within coverage, known as the "eight-corners rule" (comparing the four corners of the petition to the four corners of the policy). The duty to defend is broader than the duty to indemnify. If even one allegation in the petition states a potentially-covered claim, the insurer must defend the entire suit. Insurers typically defend under reservation of rights, preserving coverage defenses for the indemnification phase. See Reservation of Rights . Limits structure Standard CGL limits include: (1) per-occurrence limit , maximum payable for any single occurrence; (2) general aggregate limit , maximum payable for all occurrences in the policy period (other than products-completed operations); (3) products-completed operations aggregate limit , separate aggregate for products and completed operations claims; (4) personal and advertising injury limit , typically equal to per-occurrence; (5) medical payments limit , usually a small sublimit ($5,000-$10,000 per person). Common limit structures: $1M/$2M (per-occurrence/aggregate), $2M/$4M, $5M/$10M for larger operations. Excess and umbrella coverage layers above CGL for higher limits. Practical context For Texas commercial businesses, CGL is foundational risk protection. Best practice: (1) carry CGL with limits proportional to business risk, at minimum $1M/$2M for small businesses, often $2M/$4M for mid-market; (2) layer with umbrella/excess coverage for liability tail risk; (3) carefully review "insured contract" definition for indemnification coverage; (4) coordinate CGL with other policies (workers' comp, auto, pollution, professional liability) to identify gaps; (5) for contracts requiring additional insured status, require primary and noncontributory endorsements with proper form numbers; (6) maintain certificates and endorsements for all parties carrying additional insured status. Common gap: businesses with significant contract-driven exposure (construction, technology, professional services) often need specialized policies (E&O, cyber, products) layered with CGL, relying on CGL alone leaves substantial coverage gaps. Coverage counsel review of major contracts and risk profile is high-value for any mid-market business. Related Terms Additional Insured · Errors and Omissions Insurance · Excess Insurance · Stowers Doctrine · Reservation of Rights Commercial Lease § A contract by which a property owner grants a tenant the right to use specified real property for commercial purposes for a defined term in exchange for rent. Governed by Texas common law and specific statutory provisions, distinct from the more heavily-regulated residential framework. A commercial lease is a contract by which a property owner (the "landlord" or "lessor") grants a tenant (the "lessee") the right to use specified real property for commercial purposes for a defined term in exchange for rent. Commercial leases are governed by Texas common law and specific statutory provisions, distinct from the more heavily-regulated framework applicable to residential tenancies. Authority Texas common law. Tex. Prop. Code Ch. 93 (commercial tenancies); statute of frauds: Tex. Bus. & Com. Code § 26.01(b)(4) (leases over one year must be in writing). Texas landlord's lien: Tex. Prop. Code § 54.021 . Lease structures Gross lease: tenant pays a fixed rent; landlord pays operating expenses, taxes, insurance, and maintenance. Net lease: tenant pays base rent plus some operating expenses. Variations: single-net (tenant pays property taxes), double-net (tenant pays taxes and insurance), triple-net (tenant pays taxes, insurance, and maintenance, common in retail and industrial). Modified gross / modified net: hybrid structures specifying which expenses are tenant- vs landlord-paid. Key commercial-lease provisions (1) Premises description and use restrictions; (2) base rent and rent escalations (CPI, fixed bumps, market resets); (3) common-area maintenance (CAM) charges and reconciliation; (4) operating expense pass-throughs and audit rights; (5) tenant improvements and allowance; (6) renewal options; (7) assignment and subletting restrictions; (8) default and remedies; (9) personal guaranty (typical for closely-held tenants). Texas-specific considerations Texas does not regulate commercial rent or lease terms substantively, commercial leases are largely freedom-of-contract documents. The Texas landlord's lien ( Tex. Prop. Code § 54.021 ) gives commercial landlords a statutory lien on tenant property within the leased premises, supplementing contractual remedies. The 30-day notice period required for residential tenancies does not apply to commercial leases, commercial-lease termination follows the lease's notice provisions. Practical context Commercial-lease negotiation focuses on (1) operating expense and pass-through definitions (CAM caps, exclusions); (2) tenant improvements and landlord work obligations; (3) renewal and termination options; (4) personal guaranty scope and duration. Sophisticated tenant-side practice involves audit rights, exclusive-use protections, and clear assignment/subletting carve-outs for affiliates and successors. Companion article: Commercial Leases in Texas Related Terms Statute of Frauds · Guaranty Agreement Commercial Real Estate Purchase Agreement § The principal contract governing the sale of commercial real property in Texas. Distinct from residential transactions in that it is typically heavily negotiated rather than form-driven, with bespoke provisions on due diligence, financing contingencies, environmental representations, title objections, and closing conditions. Statute of frauds requires writing. A commercial real estate purchase agreement is the principal contract governing the sale of commercial real property in Texas, including office buildings, retail centers, industrial properties, raw land, and multifamily projects. Unlike residential transactions (which typically use TREC promulgated forms), commercial transactions are generally heavily negotiated through bespoke agreements drafted by counsel for each side. The contract structure follows a predictable framework but the substantive terms vary widely based on property type, deal size, and negotiating leverage. Authority Statute of Frauds: Tex. Bus. & Com. Code § 26.01 (contracts for the sale of real estate must be in writing and signed by the party to be charged). Conveyances chapter: Tex. Prop. Code Ch. 5 ; § 5.021 (instrument of conveyance must be in writing); § 5.023 (implied covenants). Title insurance regulation: Tex. Ins. Code Ch. 2501 et seq. Texas Real Estate License Act (broker representation): Tex. Occ. Code Ch. 1101 . Core deal terms Standard provisions include (1) parties and property , exact legal description, including any improvements and personal property; (2) purchase price and earnest money , typically 1%-3% deposited with a title company as escrow agent; (3) due diligence (feasibility) period , typically 30-90 days during which the buyer may terminate without penalty; (4) title and survey objection process ; (5) representations and warranties , environmental, leases, contracts, litigation, taxes; (6) closing conditions , title insurability, third-party consents, no material adverse change; (7) closing mechanics , date, place, deliverables; (8) default remedies , typically liquidated damages (earnest money) for buyer default; specific performance for seller default. Due diligence period The due diligence period is the most important risk-allocation provision in commercial real estate. During this window the buyer typically obtains physical inspections, environmental assessments (Phase I and, if warranted, Phase II), zoning verification, lease reviews, financial review of operating statements, and title and survey objections. The buyer typically has the right to terminate for any reason or no reason during this period, with full earnest money refund. After expiration, the buyer's outs narrow significantly to specific failed conditions. Title and survey Title is delivered through a Texas-form title insurance policy (typically T-1 Owner's Policy). The seller's obligation is usually framed as delivery of "marketable title insurable at standard rates," subject to "permitted exceptions" itemized in the contract. The buyer's title objection process is choreographed: title commitment delivered within X days; objection period of Y days; cure or waive; if not cured, buyer's election to terminate or close subject to the uncured objection. Earnest money handling Earnest money is typically held by the title company as escrow agent. The contract specifies whether the deposit is "refundable" (during due diligence) or "non-refundable" (after due diligence expiration, typically applied to purchase price at closing). Texas escrow law and Real Estate Commission rules govern the handling of the deposit. Disputes over earnest money release are common and frequently require interpleader if buyer and seller cannot agree. Common drafting failures Texas-specific issues that disproportionately surface in litigation: (1) ambiguous mineral rights reservations; (2) ambiguous personal property lists; (3) failure to address rollback taxes (agricultural-to-non-agricultural use); (4) overlooked tenant estoppels for leased property; (5) unclear allocation of property tax prorations; (6) absent or weak environmental indemnities; (7) ambiguity over whether the contract is assignable. Practical context Commercial real estate transactions in Texas frequently use letters of intent (LOIs) before the definitive agreement, capturing the major commercial points before counsel begins extensive drafting. The LOI should make clear which provisions are binding (typically confidentiality, exclusivity, earnest money) and which are non-binding business terms. Sloppy LOIs that fail this binding/non-binding distinction can themselves become the subject of litigation when one party seeks to enforce purported agreement. Related Terms Letter of Intent · Due Diligence · Representations and Warranties · Title Insurance · Earnest Money · Commercial Lease Company Agreement § 2025 The principal governance document of a Texas LLC, the contract among members (and managers, if applicable) that establishes the LLC's internal rules. The TBOC equivalent of "operating agreement" or "limited liability company agreement" used in other states. A company agreement is the principal governance document of a Texas LLC, the contract among the members (and, if applicable, managers) that establishes the LLC's internal rules. The TBOC uses the term "company agreement"; the Delaware equivalent is "limited liability company agreement"; the colloquial term, particularly in non-Texas markets, is "operating agreement." The terms are typically used interchangeably in practice. Authority Tex. Bus. Orgs. Code § 101.001(1) (defining "company agreement"); § 101.052 (scope and effect); § 101.053 (amendment); § 101.054 (waivable and non-waivable provisions). Governed by Texas contract law in addition to the TBOC. What it governs Under § 101.052 , the company agreement governs (a) the relations among the LLC's members, managers, officers, and assignees, and (b) other internal affairs of the company. Where the company agreement is silent, the default rules of TBOC Chapter 101 and Title 1 fill the gap. Form and execution The company agreement may be written, oral, or implied. § 101.001(1) . In practice, every responsibly-formed Texas LLC has a written company agreement, oral and implied agreements produce expensive disputes. The agreement does not need to be filed with the Texas Secretary of State and is not a public document. The Texas-distinctive flexibility Tex. Bus. Orgs. Code § 101.052(c) provides that, with limited exceptions specified in § 101.054 , any provision of TBOC Title 3 or Title 1 applicable to LLCs may be waived or modified in the company agreement. This makes the Texas company agreement the most contractually flexible governance document for any Texas business entity. Provisions that can be modified include voting rights (default: per capita, § 101.354 ), distribution rights (default: pro rata by contribution, § 101.203 ), management structure (member vs. manager-managed), and, under § 101.401 as amended effective May 14, 2025, fiduciary duties themselves, which the company agreement may now expand, restrict, or eliminate . The same SB 29 legislation added § 152.002(e) , which extends comparable elimination authority to Texas limited partnerships through the partnership agreement. Texas now offers a unified contractual-fiduciary-duty flexibility regime across LLCs and limited partnerships that is competitive with Delaware. Non-waivable provisions Under § 101.054 , certain provisions cannot be waived or modified by the company agreement, including the duty to take action in good faith, the right to information necessary for protecting member interests, and certain provisions related to indemnification and the rights of third-party creditors. Amendment Default rule: a company agreement may be amended only with the unanimous consent of all members. § 101.053 . This default is itself routinely modified, most company agreements substitute a majority-in-interest or supermajority threshold. Practical context In Texas, what the company agreement says matters more than what the statute says. The default rules in TBOC Chapter 101 frequently produce results no one would want, equal voting regardless of contribution, no withdrawal rights, distributions only when affirmatively authorized, and the company agreement is the mechanism for tailoring those rules to the parties' actual deal. A poorly drafted or non-existent Texas company agreement is the single most common source of business divorces, derivative actions, and judicial-dissolution efforts. Spending the money on a careful company agreement at formation is, by orders of magnitude, the cheapest legal investment a Texas LLC will ever make. Companion article: Starting a Business in Texas Related Terms Limited Liability Company · Member · Manager · Certificate of Formation · Fiduciary Duty Confidentiality Agreement / NDA § A contractual obligation by one or more parties to maintain the secrecy of specified information, prohibiting unauthorized disclosure or use beyond defined permitted purposes. Operates as the primary contractual layer of trade secret protection and as a foundation for noncompete enforceability. A confidentiality agreement (or non-disclosure agreement, "NDA") is a contractual obligation by one or more parties to maintain the secrecy of specified information, prohibiting unauthorized disclosure or use beyond defined permitted purposes. NDAs operate as the primary contractual layer of trade secret protection and as a foundation for noncompete enforceability. Authority Confidentiality agreements are creatures of contract, governed by Texas contract law. Coordination with Texas Uniform Trade Secrets Act, Tex. Civ. Prac. & Rem. Code Ch. 134A . Coordination with noncompete statute, Tex. Bus. & Com. Code § 15.50 . Core elements A typical confidentiality agreement specifies: (1) what information is "Confidential Information" (definition often broad, including a non-exhaustive list with carve-outs for publicly-known and independently-developed information); (2) permitted uses; (3) restrictions on disclosure to third parties; (4) protection measures the recipient must take; (5) duration; (6) return or destruction obligations on termination; (7) remedies for breach (typically including injunctive relief). Standard carve-outs Most NDAs exclude from the confidentiality obligation: (1) information already known to the recipient; (2) information that becomes publicly known through no fault of the recipient; (3) information independently developed without reference to the disclosed information; (4) information lawfully received from a third party. Disclosure required by law (subpoena, regulatory order) is also typically permitted with notice obligations. Mutual vs. unilateral Unilateral NDAs flow from a single discloser to a single recipient (typical for employer-employee or vendor relationships). Mutual NDAs flow both directions (typical for M&A diligence, joint ventures, technology partnerships). The structure should match the actual information flow. Practical context The confidentiality agreement is foundational. Without it, "confidential information" provided to an employee lacks the legal protection necessary to support either trade secret claims under TUTSA or noncompete claims under § 15.50 . Confidentiality agreements should be in place before any meaningful disclosure of business information. Companion article: Non-Competes in Texas Related Terms Trade Secret · Noncompete Agreement · Nonsolicitation Agreement · Employment Agreement · Disclosure Schedule Consideration § The bargained-for exchange that supports a contract, something of value (a promise, act, forbearance, or property) given by each party in exchange for the other's promise. Texas requires consideration for contract formation; "naked promises" without consideration are generally unenforceable. Consideration is the bargained-for exchange that supports a contract, something of value (a promise, act, forbearance, or property) given by each party in exchange for the other's promise. Texas requires consideration for contract formation; "naked promises" without consideration are generally unenforceable. Authority Texas common law. UCC modifications: Tex. Bus. & Com. Code § 2.209 (modification of sales contracts without consideration); § 1.107 (waiver or renunciation of claims by signed writing). Promissory estoppel: "Moore" Burger, Inc. v. Phillips Petroleum Co. , 492 S.W.2d 934 (Tex. 1972). Elements (1) A bargained-for exchange, each party gives something to receive something; (2) Legal value, the consideration must have legal sufficiency, though the amount need not be equivalent. Past consideration (something already given before the promise) is generally insufficient. Pre-existing duty rule A promise to do something one is already legally obligated to do is generally not consideration. Modifications of existing contracts traditionally require new consideration, though Texas, like the UCC, recognizes exceptions. UCC modification exception (§ 2.209) For sales of goods contracts, modifications need not be supported by consideration to be binding (subject to good-faith and reasonable-commercial-standards limitations). This is a deliberate UCC departure from common-law contract modification rules. Promissory estoppel (substitute for consideration) Where a promisee reasonably relies on a promise to the promisee's detriment, Texas courts may enforce the promise despite absence of formal consideration. Required elements: (1) a promise; (2) foreseeable reliance by the promisee; (3) substantial reliance to the promisee's detriment; (4) injustice avoidable only by enforcement. Practical context Consideration is rarely a serious obstacle to commercial-contract enforcement, typical commercial bargains involve reciprocal promises with obvious legal value. Consideration becomes contested in contract modification, settlement releases, employment-agreement updates (where continued at-will employment may be inadequate consideration), and gratuitous-promise disputes. Companion article: Contract Disputes in Texas Related Terms Statute of Frauds · Sale of Goods · Liquidated Damages Construction Contract § A contract governing the construction, alteration, repair, or improvement of real property. Texas construction contracts are subject to the Anti-Indemnity Act (Tex. Ins. Code Ch. 151), the mechanic's lien statute (Tex. Prop. Code Ch. 53), the Prompt Payment Act (Tex. Prop. Code Ch. 28), and a substantial body of project-delivery case law. A construction contract is a contract governing the construction, alteration, repair, or improvement of real property. Texas construction law layers multiple statutory schemes onto private contract, the Anti-Indemnity Act, the mechanic's lien statute, the Prompt Payment Act, and various project-delivery method regulations, that materially affect what parties can and cannot agree to. Industry-standard form contracts (AIA, ConsensusDocs) are commonly used but require Texas-specific modifications to comply with these statutory overlays. Authority Texas Anti-Indemnity Act (TAIA): Tex. Ins. Code Ch. 151, Subch. C ; key provisions §§ 151.101-151.105 . Mechanic's lien framework: Tex. Prop. Code Ch. 53 . Prompt Payment Act (private projects): Tex. Prop. Code Ch. 28 . Prompt Payment Act (public projects): Tex. Gov't Code Ch. 2251 . Statute of repose for design and construction defects: Tex. Civ. Prac. & Rem. Code § 16.008 (architects/engineers, 10 years); § 16.009 (contractors, 10 years). Project-delivery methods Common Texas commercial delivery methods include: (1) design-bid-build , owner contracts separately with designer and contractor; lowest-bid award typical; (2) design-build , single entity provides both design and construction; (3) construction manager at-risk (CMAR) , CM provides preconstruction services and then takes price risk via guaranteed maximum price; (4) integrated project delivery (IPD) , multi-party agreements integrating owner, designer, and contractor; (5) job-order contracting , common on public projects for repetitive work. Each method has distinct contract structures and risk-allocation patterns. Pricing structures Standard pricing approaches: (1) lump sum / stipulated price , fixed price for defined scope; risk on contractor; (2) cost-plus-fee , owner reimburses actual costs plus a defined fee; risk on owner; (3) guaranteed maximum price (GMP) , cost-plus with a ceiling; shared risk above GMP, often with savings-sharing below; (4) unit price , payment by quantity of work installed; (5) time-and-materials , most commonly used for emergency or change-order work, not whole projects. Texas-specific compliance overlays Texas construction contracts must reckon with: (1) the TAIA voiding broad-form indemnity that protects the indemnitee from its own fault; (2) the mechanic's lien framework requiring statutory notice and lien-filing procedures (post-HB 2237 amendments for contracts entered after January 1, 2022); (3) Prompt Payment Act mandates of 35-day owner-to-prime payment and 7-day prime-to-sub payment, with 1.5%/month interest for late payment; (4) statutes of repose limiting design and construction-defect claims to 10 years; and (5) special rules for residential construction under the Property Code. Common disputes Recurring construction disputes in Texas include: (1) scope of work and change-order disputes; (2) delay claims and concurrent-delay analysis; (3) defective work claims; (4) payment claims (often invoking lien rights and Prompt Payment Act); (5) differing site conditions; (6) liquidated damages for late completion; (7) termination for convenience vs. termination for default. Forum and venue selection matter greatly given the launch of the Texas Business Court (effective September 1, 2024), many sophisticated commercial construction disputes meeting the threshold may now be litigated in that specialized forum. Practical context For Texas owners and contractors, the construction contract is the single most important risk-management document on a project. AIA and ConsensusDocs forms provide a sophisticated starting point but require Texas-specific edits, particularly to indemnification (TAIA compliance), payment timing (Prompt Payment Act), and lien-related provisions. Form-only execution without legal review is a frequent driver of downstream disputes, particularly on projects above $500K where the cost of customization is small relative to the dispute exposure. Related Terms Texas Construction Anti-Indemnity Act · Texas Prompt Payment Act · Mechanic's and Materialman's Lien · Retainage · Liquidated Damages · Indemnification (Corporate) Conversion § A TBOC-authorized transaction in which a Texas business entity changes its form (e.g., LLC to corporation) or jurisdiction of formation (e.g., Delaware corporation to Texas corporation) without dissolving and reforming. Contracts, debts, and liabilities continue uninterrupted. Conversion is a TBOC-authorized transaction in which a Texas business entity changes its form (e.g., LLC to corporation, corporation to LLC, partnership to LLC) or its jurisdiction of formation (e.g., Delaware corporation to Texas corporation) without dissolving and reforming. The converted entity is the same legal person before and after the conversion; contracts, debts, and liabilities continue uninterrupted. Authority Tex. Bus. Orgs. Code Subchapter B of Chapter 10: §§ 10.101–10.108 (conversion procedures); § 10.106 (effect of conversion); §§ 10.151–10.156 (filing requirements). Plan of conversion Under § 10.103 , the plan of conversion must specify the name of the converting and converted entity, their respective forms, the manner of converting interests, and the certificate of formation or governing documents of the converted entity. The plan must be approved as required by the converting entity's governing documents and the TBOC (typically by the same vote required for a fundamental action, two-thirds of outstanding voting shares for a corporation, unless the certificate provides for a lower threshold). Effect of conversion (§ 10.106) On the effective date: (1) the converting entity continues to exist in the converted form; (2) all rights, title, and interests in property pass to the converted entity by operation of law; (3) all debts, liabilities, and obligations of the converting entity continue as obligations of the converted entity; and (4) all proceedings pending against the converting entity continue against the converted entity. Practical context Conversion is the standard mechanism for entity-form changes (LLC-to-corporation pre-IPO; corporation-to-LLC for tax planning) and for re-domiciling from another state to Texas. The conversion procedure is generally faster and more efficient than dissolving the existing entity and reforming as the new entity. Related Terms Corporation · Limited Liability Company · Merger · Certificate of Formation Convertible Note § A debt instrument that converts to equity (typically preferred stock) upon a qualified equity financing, with a valuation cap, discount, or both. Convertible notes accrue interest (typically 4-8% annually) and have a maturity date (typically 18-24 months) at which they must be repaid or converted. Largely displaced by SAFEs in U.S. seed-stage financing but remain common in some contexts (later-stage bridges, more-investor-friendly markets, §1202 QSBS holding-period optimization). A convertible note is a debt instrument that converts to equity (typically preferred stock) upon a qualified equity financing event, with a valuation cap, discount, or both. Convertible notes are debt instruments, they accrue interest (typically 4-8% annually), have a maturity date (typically 18-24 months), and must be repaid or converted at maturity. Convertible notes were the dominant early-stage U.S. financing instrument until SAFEs displaced them in the 2010s, but they remain common in later-stage bridges, investor-friendly markets, and contexts where the debt features (interest accrual, maturity leverage, §1202 holding-period start) are valuable. Authority Securities law treatment: convertible notes are securities subject to Securities Act of 1933 and SEC regulations; typically issued under Rule 506(b) or 506(c) of Regulation D. State law: governed by general contract law, UCC Article 3 for promissory note features, and corporate law of issuer's state. Texas: Tex. Bus. & Com. Code Ch. 3 (Texas UCC negotiable instruments, applicable to promissory note features). Tax: 26 U.S.C. § 1202 (QSBS holding period considerations). Standard terms Convertible note terms typically include: (1) principal amount , investment amount; (2) interest rate , typically 4-8% annually; simple or compound; (3) maturity date , typically 18-24 months; (4) conversion mechanics , qualified financing trigger ($1M+ minimum size standard), valuation cap, discount; (5) conversion price , generally lower of cap price or discount price; (6) change of control , typically 1x or 2x repayment, or conversion at cap, at investor option; (7) events of default ; (8) subordination , to senior debt; (9) amendment provisions ; (10) governing law . Conversion at qualified financing Convertible note conversion mechanics: (1) qualified financing trigger , equity financing meeting minimum size threshold; (2) conversion price , lower of cap price or financing price minus discount; (3) shares received , principal plus accrued interest divided by conversion price; (4) same securities , typically same series of preferred stock as financing investors (with possible exceptions for shadow series). Accrued interest converts alongside principal, meaning the longer the period before conversion, the more shares the investor receives. Maturity date scenarios If qualified financing has not occurred by maturity, several scenarios can apply (per note terms): (1) repayment , note becomes due and payable; (2) automatic conversion at fixed conversion price (e.g., cap price); (3) investor election between repayment and conversion; (4) extension if both parties agree; (5) default if not repaid and conversion option not exercised. Maturity creates negotiating leverage for investors, facing default exposure, founders may agree to renegotiate terms or convert on terms favorable to investors. SAFE vs. convertible note comparison Key trade-offs: (1) founder perspective , SAFEs are simpler (no debt, no maturity, no interest); convertible notes create maturity pressure; (2) investor perspective , convertible notes provide more protection (interest accrual, maturity leverage, default rights); SAFEs are cleaner but less protective; (3) cap table , both create future dilution at conversion; convertible note dilution is larger because of interest accrual; (4) tax , convertible notes start §1202 QSBS holding period at investment; SAFEs typically start at conversion; (5) balance sheet , convertible notes are debt liability; SAFEs are typically equity. The choice depends on context: founder-friendly markets favor SAFEs; investor-friendly markets and bridge contexts favor convertible notes. The §1202 QSBS holding-period advantage Convertible notes have a meaningful tax advantage over SAFEs for investors seeking §1202 QSBS exclusion: (1) convertible notes , §1202 holding period typically begins at note issuance (debt is exchanged for stock at conversion, but holding period tacks); (2) SAFEs , §1202 holding period typically begins at conversion since SAFEs are not stock. For investors expecting §1202 exit (5-year holding period for qualifying small business stock with substantial gain exclusion), convertible notes can save substantial tax. This advantage drives convertible note usage in some seed deals, particularly with sophisticated investors. Common drafting issues Recurring convertible note drafting issues: (1) qualified financing definition , minimum size, type of equity (preferred or any), inclusion of SAFE conversions; (2) cap calculation , pre-money or post-money basis; (3) interest rate , too low and investor return is inadequate; too high and dilution is excessive; (4) change of control payout , 1x or 2x principal, or conversion at cap; sophisticated investors push for higher payout; (5) amendment threshold , majority or supermajority required for changes; (6) most favored nation provisions. Each provision affects both parties' economics; careful negotiation is essential. Practical context For Texas startups, convertible note vs. SAFE selection depends on context. Best practice: (1) for typical seed financings, SAFEs are simpler and market-standard; (2) for bridges between rounds, convertible notes provide structure and creditor protection; (3) for sophisticated investors expecting §1202 exits, convertible notes offer tax advantages; (4) for founders worried about maturity pressure, SAFEs avoid the issue; (5) for investor-friendly markets, convertible notes are commonly preferred. Best practice: (1) maintain comprehensive cap table tracking all outstanding notes and their conversion mechanics; (2) calendar maturity dates carefully, failures generate default risk; (3) coordinate convertible note conversion at qualified financing with broader round documentation; (4) ensure proper Reg D compliance for note issuance. For investors: (1) understand interest accrual and dilution implications; (2) evaluate change of control payout, important if exit precedes qualified financing; (3) coordinate §1202 holding period; (4) document representations on accredited status. Common pitfall: founders missing maturity date, generating default and creditor claims that complicate subsequent financings. Related Terms SAFE · Regulation D · Accredited Investor · Section 1202 · Promissory Note Copyright § 2025 A federal grant of exclusive rights in original works of authorship fixed in a tangible medium of expression. Protection arises automatically upon fixation; registration is a prerequisite to filing an infringement suit. Governed entirely by federal law. Copyright is a federal grant of exclusive rights in an original work of authorship that has been fixed in a tangible medium of expression. Protection arises automatically the moment the work is fixed; no registration, notice, or publication is required for the right to exist. Registration with the U.S. Copyright Office is, however, a prerequisite to filing an infringement suit and unlocks statutory damages and attorney's fees. Authority Copyright Act of 1976, 17 U.S.C. § 101 et seq.: § 102 (subject matter); § 106 (exclusive rights); § 107 (fair use); § 201 (ownership; works made for hire); § 411 (registration as suit prerequisite); § 504 (damages); § 512 (DMCA safe harbor). Recent Supreme Court authority: Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith , 598 U.S. 508 (2023) (commercial purpose narrows fair use). D.C. Circuit on AI authorship: Thaler v. Perlmutter , 130 F.4th 1009 (D.C. Cir. 2025) (human authorship required), cert. denied, No. 25-449 (Mar. 2, 2026). Subject matter and the fixation requirement Section 102(a) protects original works of authorship fixed in any tangible medium. Categories include literary works, musical works, dramatic works, pictorial/graphic/sculptural works, motion pictures, sound recordings, architectural works, and computer programs (treated as literary works). The originality bar is low, modest creative spark is sufficient, but ideas, facts, procedures, processes, systems, and methods of operation are excluded under § 102(b). Exclusive rights and infringement Section 106 grants the copyright owner the exclusive rights to reproduce, prepare derivative works, distribute, perform, and display the work publicly. Infringement is established by proving ownership and copying of constituent elements that are original. Statutory damages range from $750 to $30,000 per work for ordinary infringement and up to $150,000 per work for willful infringement, plus attorney's fees in successful registered-work cases. Fair use after Warhol The four-factor fair use analysis under § 107 was reframed by Andy Warhol Foundation v. Goldsmith (2023). The Supreme Court held that the first factor, purpose and character of the use, turns on whether the new use shares the same commercial purpose as the original, not merely on whether it adds new expression. Commercial uses with substantially similar purposes to the original receive narrower fair use protection than the pre-Warhol "transformative use" doctrine had suggested. AI-generated works The U.S. Copyright Office and the D.C. Circuit have held that human authorship is required for copyright protection. Thaler v. Perlmutter (D.C. Cir. 2025) affirmed the denial of registration for a work created entirely by an AI system. The Copyright Office's January 2025 guidance further clarifies that prompts alone are insufficient to make the prompter the author, but works combining AI assistance with sufficient human creative contribution remain protectable for the human-authored portions. See also Generative AI Output . Practical context For Texas businesses, copyright most commonly affects (1) software code and databases; (2) marketing materials, photography, and website copy; (3) employee-created content and contractor work product; and (4) AI-assisted content generation. Federal preemption means copyright is litigated in federal court, not Texas state court. Registration is inexpensive ($45-$125) and unlocks statutory damages, best practice is to register valuable works promptly upon creation. Related Terms Work-for-Hire Doctrine · License Agreement · IP Assignment · Trade Secret · Generative AI Output Corporation § 2025 A Texas for-profit corporation under TBOC Title 2, Chapter 21, a separate legal entity owned by shareholders, governed by a board of directors, and managed day-to-day by officers appointed by the board. A Texas for-profit corporation is a separate legal entity formed by filing a certificate of formation with the Texas Secretary of State under TBOC Title 2, Chapter 21. The corporation is owned by shareholders (who hold stock representing equity ownership), governed by a board of directors elected by the shareholders, and managed day-to-day by officers appointed by the board. Authority Tex. Bus. Orgs. Code Title 2, Chapter 21 (governing for-profit corporations); Title 1 (general provisions). Subchapter S governs public benefit corporations; Subchapter O governs close corporations. § 21.001 (applicability); § 21.002 (definitions). The three-tier governance structure Shareholders own the corporation, vote on fundamental corporate transactions and election of directors, and receive dividends when declared. Subchapter H governs shareholder meetings. Board of directors manages or directs the management of the corporation. Subchapter I ( §§ 21.401–21.418 ) governs board structure, election, term, removal, vacancies, and meeting procedures. Officers execute board policy and manage day-to-day operations. Subchapter F ( §§ 21.301–21.305 ). The shareholders' agreement option §§ 21.101–21.110 permit shareholders to enter into an agreement that may eliminate the board of directors entirely, restrict the discretion or powers of the board, govern dividend distributions, control share transfer, govern the resolution of deadlocks, and address dissolution and termination. § 21.101(a) . This makes Texas corporations significantly more contractually flexible than many practitioners assume. Director and officer fiduciary duties Texas corporate fiduciary duties are not codified in the TBOC. They are common-law duties developed through Texas Supreme Court decisions and the Fifth Circuit's interpretation of Texas law. See Fiduciary Duty. The certificate of formation may, under § 7.001 , eliminate or limit the personal liability of directors for breach of the duty of care. The 2024–2025 corporate-governance overhaul House Bill 19 (88th Leg., 2023; eff. Sept. 1, 2024) created the Texas Business Court and Fifteenth Court of Appeals. See Texas Business Court. Senate Bill 29 (89th Leg., 2025; eff. May 14, 2025) made the most significant changes to Texas corporate-governance law in a generation. SB 29 (a) codified the business judgment rule for publicly-traded and opt-in Texas for-profit corporations at new § 21.419 ; (b) authorized ownership-threshold restrictions on derivative standing at new § 21.552(a)(3) (capped at 3% of outstanding shares); (c) limited attorney's fees recovery for disclosure-only derivative settlements at new § 21.561(c) ; (d) narrowed shareholder books-and-records inspection rights at amended § 21.218 ; (e) authorized exclusive-forum clauses in governing documents at amended § 2.115 ; (f) authorized jury-waiver provisions in governing documents at new § 2.116 ; and (g) extended fiduciary-duty elimination authority to limited partnerships at new § 152.002(e) . Most SB 29 protections do not apply automatically to private corporations, the corporation must affirmatively opt into the relevant provisions. House Bill 40 (89th Leg., 2025; eff. Sept. 1, 2025) reduced the Texas Business Court's amount-in-controversy threshold from $10 million to $5 million for most categories of corporate-governance and fiduciary-duty disputes. Practical context Despite the dominance of LLCs in new Texas entity formation, the for-profit corporation remains the standard structure for businesses that anticipate going public, raising venture capital, granting incentive stock options, or operating with a traditional board governance model. The corporation's structural rigidity, relative to the LLC's contractual flexibility, is sometimes a feature rather than a bug. The combined effect of the Texas Business Court (operational since September 1, 2024), the SB 29 corporate-governance reforms (effective May 14, 2025), and HB 40's threshold reduction (effective September 1, 2025) is to position Texas as a serious competitor to Delaware as a state of corporate domicile for the first time in modern history. Companion article: Starting a Business in Texas Related Terms Director · Shareholder · Bylaws · Certificate of Formation · Business Judgment Rule · Fiduciary Duty · Texas Business Court · Closely Held Corporation Covenant (Financial) § A contractual obligation in a credit agreement requiring the borrower to maintain specified financial conditions or refrain from specified actions during the loan term. Affirmative covenants require the borrower to do something (deliver financial statements, maintain insurance); negative covenants restrict actions (additional debt, distributions); financial covenants impose ratio tests (leverage, debt service coverage, fixed charge coverage). Breach is a default subject to lender remedies. A covenant in a financial-agreement context is a contractual obligation requiring the borrower to maintain specified financial conditions or refrain from specified actions during the loan term. Covenants serve two principal functions: (1) maintaining the credit profile that justified the lending decision and (2) providing early-warning triggers that allow the lender to intervene before the borrower's financial condition deteriorates beyond recovery. Three principal categories: affirmative, negative, and financial covenants. Authority General Texas contract law. Loan agreement covenants are creatures of private contract. Default and acceleration: typically governed by the credit agreement's events-of-default provisions. Texas usury overlay: Tex. Fin. Code Ch. 302-303 (interest rate limits applicable to the loan, including any default-rate provisions). Bankruptcy treatment of covenant defaults: 11 U.S.C. § 365 (executory contracts) and § 1124 (cure provisions in plans of reorganization). Affirmative covenants Affirmative covenants require the borrower to take specified actions. Common examples: (1) deliver audited annual financial statements within 120 days of fiscal year-end; (2) deliver quarterly compliance certificates; (3) maintain insurance covering specified risks at specified levels; (4) maintain corporate existence and good standing; (5) comply with material laws and permits; (6) pay taxes when due; (7) maintain books and records; (8) provide access to facilities and records on reasonable notice; (9) preserve collateral and lien priority. Most affirmative covenants are administrative, but failure to perform can constitute an event of default. Negative covenants Negative covenants restrict the borrower from taking specified actions. Common examples: (1) prohibition on additional debt above stated thresholds (with permitted-debt exceptions); (2) prohibition on liens (with permitted-liens exceptions); (3) restrictions on dividends and distributions; (4) restrictions on M&A activity; (5) restrictions on asset dispositions; (6) restrictions on affiliate transactions; (7) restrictions on changes in line of business; (8) restrictions on amendment of organizational documents or material contracts. Negative covenants are extensively negotiated; the carve-outs ("baskets" and "thresholds") often determine the practical operating flexibility of the borrower. Financial covenants Financial covenants impose ratio or absolute-dollar tests on the borrower's financial performance. Common metrics: (1) leverage ratio , total debt to EBITDA, capped at a stated multiple (e.g., 4.0x); (2) debt service coverage ratio (DSCR) , EBITDA or cash flow to debt service, with a floor (e.g., 1.20x); (3) fixed charge coverage ratio , EBITDA to fixed charges (interest, lease payments, taxes); (4) minimum EBITDA , absolute floor on operating performance; (5) minimum tangible net worth . Each metric requires definitions of its component terms, these definitions are heavily negotiated and material to the practical effect. Covenant breach and cure Breach of a covenant is typically an event of default under the credit agreement, triggering the lender's remedies, acceleration of the loan, default-rate interest, foreclosure on collateral, and exercise of other rights. Many credit agreements provide cure rights: (1) grace periods for affirmative covenant defaults; (2) equity cures for financial-covenant defaults, permitting the borrower to remedy a financial-ratio breach by injecting equity capital that is added to EBITDA or applied to debt; (3) force majeure excuses in limited circumstances. Lenders frequently use covenant breaches as negotiation leverage to extract amendments, fees, or additional collateral rather than acceleration. Practical drafting considerations The key drafting points: (1) definitions matter , EBITDA, total debt, fixed charges, and similar terms must be defined precisely; (2) permitted exceptions , every restriction needs operational carve-outs sized for the borrower's reasonable business needs; (3) cure rights , equity-cure mechanics, frequency limits, and impact on subsequent periods; (4) cross-default , whether default on other indebtedness triggers default under this loan; (5) materiality qualifiers , "material adverse effect" language tempering breach consequences for minor failures. Practical context For Texas borrowers, the practical impact of covenants is typically felt during a downturn, the financial covenants that seemed loose at closing become tight as performance declines. Best practice: (1) build a covenant-compliance forecasting model at closing; (2) test compliance monthly using forward-looking EBITDA projections; (3) engage with the lender at the first signs of covenant pressure (lenders generally prefer proactive amendments to reactive defaults); (4) maintain detailed records supporting financial covenant calculations; (5) consider equity-cure capacity in capital-stack planning. For lenders, well-designed covenants are early-warning systems, if covenants are never tested or always loosely complied with, they are not doing their job. Related Terms Promissory Note · Guaranty Agreement · Material Adverse Change · Default · Acceleration Clause Cumulative Voting § A method of voting in director elections that gives each shareholder votes equal to shares held multiplied by directors to be elected, with all votes castable for a single candidate or distributed. Enables minority shareholders to elect at least one director when their stake is sufficient. Cumulative voting is a method of voting in director elections that gives each shareholder a number of votes equal to the number of shares held multiplied by the number of directors to be elected, with all such votes castable for a single candidate or distributed among multiple candidates. It enables minority shareholders to elect at least one director when their ownership stake is sufficient to overcome the relevant mathematical threshold. Authority Tex. Bus. Orgs. Code § 21.360 (no cumulative voting unless authorized); § 21.361 (cumulative voting in election of directors); § 21.362 (cumulative voting right in certain corporations). Texas default Texas is an opt-in cumulative-voting state. Under § 21.360 , shareholders do not have the right to cumulate their votes unless the certificate of formation expressly provides for cumulative voting. This is the opposite of older statutes that imposed cumulative voting by default. Calculation example A shareholder holding 100 shares in an election of three directors has 300 votes under cumulative voting, which may be cast 300-for-one or distributed 100-100-100. Under standard plurality voting, the same shareholder has 100 votes per director seat. Notice requirement Under § 21.361 , where cumulative voting is authorized, a shareholder must provide written notice to the corporation's secretary at least one day before the meeting of the shareholder's intent to cumulate votes. Practical context Cumulative voting is rarely adopted in modern Texas corporations. Closely-held corporations typically prefer the predictability of straight plurality voting; venture-backed corporations achieve minority-board representation through class-voting structures rather than cumulative voting. Companion article: Raising Capital in Texas Related Terms Voting · Director · Shareholder · Class Voting / Series Voting Cyber Insurance § 2024 A specialized insurance product covering risks associated with cyber events, data breaches, ransomware, business interruption from cyber incidents, regulatory investigations, and third-party liability for cyber-related harm. Typically includes both first-party coverage (the insured's own losses, forensics, notification, business interruption, ransom payments) and third-party coverage (claims by others, customers, regulators, payment networks). Market has matured significantly; underwriting now requires substantial security controls. Cyber insurance is a specialized insurance product covering risks associated with cyber events, data breaches, ransomware attacks, business interruption from cyber incidents, regulatory investigations, and third-party liability arising from cyber-related harm. The market has matured rapidly: from a niche product 15 years ago to a standard component of commercial insurance programs. Underwriting practices have tightened significantly with rising claim costs, particularly from ransomware. Modern policies typically require substantial security controls (multi-factor authentication, endpoint detection, backup discipline) as conditions of coverage. Authority Cyber insurance is a specialty product without a single standard form (unlike CGL). Coverage varies substantially among carriers (AIG, Beazley, Chubb, Travelers, Hiscox, Coalition, At-Bay, etc.). Texas regulatory framework: Tex. Bus. & Com. Code § 521.053 (notification of breach of system security); Tex. Bus. & Com. Code Ch. 541 (Texas Data Privacy and Security Act, eff. July 1, 2024). Federal sources of cyber liability: HIPAA (healthcare data); GLBA (financial data); FTC Act § 5 (unfair/deceptive practices); various state breach notification laws (all 50 states). Market data: typical cyber breach cost (IBM Cost of a Data Breach Report 2024) approximately $4.88M average per breach; ransomware payments and recovery costs continue to escalate. Coverage structure, first-party First-party cyber coverage addresses the insured's own losses arising from a cyber event: (1) incident response , forensic investigation, IT remediation, legal counsel; (2) notification costs , notifying affected individuals as required by breach laws; (3) credit monitoring for affected individuals (often 1-2 years); (4) public relations , crisis communications and reputation management; (5) business interruption , lost income from systems being unavailable; (6) contingent business interruption , losses from third-party providers (cloud, payment processors) experiencing cyber events; (7) data restoration , costs to recover lost or corrupted data; (8) cyber extortion , ransomware payments and negotiation costs (subject to OFAC sanctions compliance); (9) fraudulent funds transfer , coverage for social engineering/business email compromise (often sub-limited). Coverage structure, third-party Third-party cyber coverage addresses claims by others arising from a cyber event: (1) privacy liability , claims by individuals whose data was compromised; (2) regulatory defense , investigations and proceedings by regulators (FTC, state AGs, sectoral regulators); (3) regulatory fines and penalties , coverage where insurable (varies by jurisdiction; some fines uninsurable for public policy reasons); (4) PCI fines and assessments , penalties from payment card networks for breaches involving cardholder data; (5) media liability , defamation, copyright, trademark claims arising from online content; (6) network security liability , claims by parties whose networks or data were harmed by malware originating from the insured's systems. Common exclusions and limitations Modern cyber policies contain significant exclusions: (1) war and terrorism , particularly nation-state attribution exclusions, which have been heavily litigated post-NotPetya (Mondelez v. Zurich); (2) infrastructure failure not caused by cyber attack; (3) bodily injury and property damage , typically routed to other policies; (4) known incidents , events known prior to inception; (5) fraudulent acts of the insured ; (6) contractual liability in some forms; (7) OFAC-prohibited ransom payments , coverage cannot fund payments to sanctioned actors. Sublimits and coinsurance are common: ransomware sub-limits, social engineering sub-limits, regulatory sub-limits. Underwriting requirements (post-2021) The cyber insurance market has tightened significantly post-2020 due to rising ransomware claim costs. Modern underwriting typically requires: (1) multi-factor authentication (MFA) on all remote access, email, and privileged accounts; (2) endpoint detection and response (EDR) deployment; (3) privileged access management (PAM); (4) email security with phishing protection; (5) backup discipline , offline or immutable backups; (6) incident response plan ; (7) employee security training ; (8) vulnerability management with regular patching; (9) network segmentation ; (10) vendor risk management . Failure to maintain stated controls during the policy period can void coverage. Texas regulatory exposure Texas-based cyber insureds face several layered regulatory exposures: (1) Texas breach notification under Tex. Bus. & Com. Code § 521.053 (60-day notification requirement); (2) Texas Data Privacy and Security Act (TDPSA, effective July 1, 2024), sectoral compliance requirements with civil penalties up to $7,500 per violation; (3) federal sectoral laws , HIPAA (healthcare), GLBA (financial), COPPA (children); (4) FTC enforcement for unfair/deceptive data practices; (5) plaintiff class actions , Texas residents have state-law privacy claims and federal claims under various theories. Cyber insurance addresses defense and (in many cases) settlement costs across all these vectors. Ransomware and OFAC Ransomware payments raise OFAC compliance issues. The Treasury Department's Office of Foreign Assets Control (OFAC) maintains a sanctions list of designated individuals and entities. Payments to sanctioned actors are unlawful regardless of the urgency of the situation. OFAC's October 2020 advisory (and subsequent updates) emphasizes that ransomware payments may violate sanctions, with exposure for both the victim and any facilitating parties (insurers, ransomware negotiators, financial institutions). Cyber insurance policies typically condition ransom-payment coverage on OFAC compliance, payments to sanctioned actors are excluded. Best practice: engage OFAC-aware ransomware negotiation specialists who can run sanctions checks before any payment. Coordination with other coverage Cyber claims often implicate multiple insurance policies: (1) CGL , possible privacy injury coverage under Coverage B, though most modern CGLs exclude cyber; (2) D&O , securities and shareholder claims arising from cyber disclosure failures; (3) E&O , professional liability for technology providers; (4) crime/fidelity , employee theft and computer fraud; (5) kidnap and ransom , sometimes overlaps with cyber extortion. Sophisticated insurance programs coordinate cyber with these other coverages to avoid gaps and disputes among insurers. Practical context For Texas businesses, cyber insurance is increasingly essential. Best practice: (1) carry cyber insurance proportional to data sensitivity and business size, minimum $1M for small businesses with consumer data, often $5M-$25M for mid-market; (2) maintain underwriting-required security controls during the policy period (failures void coverage); (3) coordinate cyber with CGL, D&O, E&O, and crime policies to avoid gaps; (4) review war/nation-state exclusions carefully (recent litigation has narrowed coverage for state-sponsored attacks); (5) maintain incident response plans with pre-arranged forensic, legal, and PR resources; (6) for ransomware, engage OFAC-aware specialists before paying; (7) document security controls and policies to support claims. Common gap: many businesses still rely on CGL Coverage B for cyber exposure, most modern CGLs exclude cyber, so this approach leaves businesses uncovered. Standalone cyber insurance is the modern standard. Companion article: Data Breach Response Related Terms Texas Data Privacy and Security Act · Commercial General Liability Insurance · Errors and Omissions Insurance · Directors and Officers Insurance · Representations and Warranties Insurance D Daubert and Robinson Standards § The Texas framework for judicial gatekeeping of expert witness reliability. The Texas Supreme Court adopted the Daubert framework in E.I. du Pont de Nemours & Co. v. Robinson, 923 S.W.2d 549 (Tex. 1995), articulating six non-exclusive factors for evaluating the reliability of scientific expert testimony. Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713 (Tex. 1998), extended reliability gatekeeping to all expert testimony, including non-scientific opinion, through the "analytical gap" test. The Daubert and Robinson standards together establish the Texas framework for judicial gatekeeping of expert witness reliability. The Texas Supreme Court adopted the federal Daubert framework in E.I. du Pont de Nemours & Co. v. Robinson , 923 S.W.2d 549 (Tex. 1995), and elaborated it through six non-exclusive factors evaluating the reliability of scientific expert testimony. Gammill v. Jack Williams Chevrolet, Inc. , 972 S.W.2d 713 (Tex. 1998), extended reliability gatekeeping to all expert testimony, including non-scientific or experience-based opinion, through the "analytical gap" test. Authority Federal foundation: Daubert v. Merrell Dow Pharmaceuticals , 509 U.S. 579 (1993); General Electric Co. v. Joiner , 522 U.S. 136 (1997); Kumho Tire Co. v. Carmichael , 526 U.S. 137 (1999). Texas adoption: E.I. du Pont de Nemours & Co. v. Robinson , 923 S.W.2d 549 (Tex. 1995). Extension to all expert testimony: Gammill v. Jack Williams Chevrolet, Inc. , 972 S.W.2d 713 (Tex. 1998). Texas Rules of Evidence: Tex. R. Evid. 702 (testimony by expert witnesses); Tex. R. Evid. 703 (basis of expert opinion); Tex. R. Evid. 705 (disclosure of underlying facts or data). Procedural framework: Tex. R. Civ. P. 195 (expert disclosure). The six Robinson factors Section 702 of the Texas Rules of Evidence permits expert testimony only where it will assist the trier of fact and the witness is qualified. Robinson articulates six non-exclusive factors for evaluating the reliability of scientific expert testimony: (1) the extent to which the underlying theory has been or can be tested; (2) the extent to which the technique relies on the subjective interpretation of the expert; (3) whether the theory has been subjected to peer review and publication; (4) the technique's potential rate of error; (5) whether the underlying theory or technique has been generally accepted as valid by the relevant scientific community; and (6) the non-judicial uses to which the technique has been put. No single factor is dispositive; the trial court applies them flexibly. Gammill and the analytical gap test Gammill v. Jack Williams Chevrolet, Inc. , 972 S.W.2d 713 (Tex. 1998), extended Robinson's reliability gatekeeping to non-scientific expert testimony, experience-based opinion in fields like accident reconstruction, business valuation, and various engineering disciplines. Where the Robinson factors don't fit (because the testimony isn't subject to scientific testing in the traditional sense), Texas courts apply the "analytical gap" test: (1) is the field a legitimate field of expertise; (2) does the testimony fall within the scope of the field; and (3) does the testimony properly rely on the principles of the field rather than relying on the bare assertion of the expert. The analytical gap is the disconnect between the data and the conclusion, courts exclude opinions where the gap is too wide. Procedural mechanics, the Daubert challenge Reliability challenges to expert testimony are typically raised pretrial through motion to exclude (sometimes called a "Daubert motion" or "Robinson motion"). The proper procedure: (1) timely written objection identifying the specific reliability concerns; (2) motion to exclude with supporting evidence; (3) hearing, the trial court has discretion whether to conduct an evidentiary hearing; (4) on the record, specific findings supporting admission or exclusion. Failure to challenge reliability before trial generally waives the objection. Procedural framework requires expert disclosure under Tex. R. Civ. P. 195 well in advance, providing the opposing party adequate time to mount a challenge. Soft sciences and experience-based testimony For "soft sciences", psychology, psychiatry, social sciences, and pure experience-based opinion, courts apply the analytical-gap test rather than the Robinson factors. The court evaluates whether the expert's field is legitimate, whether the testimony falls within that field, and whether the expert is properly applying the field's methods to the facts. Pure experience-based opinions ("I've seen 1,000 of these and this one is X") are admissible when the experience is genuinely relevant and the expert's reasoning can be evaluated by the fact-finder. Bare credentials plus conclusion is not enough; the expert must show some methodology connecting facts to conclusion. Common reliability problems Recurring patterns of expert exclusion: (1) untested methodology , opinions based on novel theories without empirical validation; (2) excessive subjectivity , opinions that rely entirely on the expert's intuition without disclosed methodology; (3) analytical gap , conclusions that don't follow from the disclosed data; (4) application to facts , methodology that may be reliable in general but is not properly applied to the case facts; (5) scope , opinions outside the expert's qualifications; (6) ipse dixit opinions, "because I said so" without disclosed reasoning. Practical context For Texas commercial litigants, the expert reliability challenge is one of the most consequential pretrial motions. A successful challenge can eliminate the opposing party's only damages theory, only causation evidence, or only liability theory, converting a contested case into one suitable for summary judgment. Best practice: (1) conduct rigorous reliability analysis on every opposing expert; (2) take expert depositions probing methodology, not just conclusions; (3) prepare Daubert motions early (prior to summary judgment, where possible); (4) for proponents, prepare experts to articulate methodology with reference to Robinson factors or analytical-gap criteria; (5) put detailed methodology in expert reports rather than reserving for trial. The Texas standard is functionally similar to federal practice; experts and counsel comfortable with Daubert practice will find the Texas framework familiar. Related Terms Expert Witness Disclosure · Summary Judgment · Motion in Limine · JNOV Debtor-in-Possession (DIP) § The debtor in a Chapter 11 case who remains in possession and management of assets and operations rather than having a trustee appointed. DIP exercises the rights, powers, and duties of a trustee under 11 U.S.C. § 1107, operating the business as fiduciary for creditors. Default status in Chapter 11 absent cause for trustee appointment (fraud, dishonesty, gross mismanagement). Also commonly refers to DIP financing, post-petition lending with super-priority status. The Debtor-in-Possession (DIP) is the debtor in a Chapter 11 case who remains in possession and management of assets and operations rather than having a trustee appointed. Section 1107 grants the DIP the rights, powers, and duties of a trustee, operating the business as fiduciary for creditors. DIP status is the Chapter 11 default; trustee appointment occurs only for cause. The term also commonly refers to DIP financing, post-petition lending with super-priority status under § 364, allowing distressed companies to obtain working capital during reorganization. Authority Federal statute: 11 U.S.C. § 1107 (DIP rights and duties); § 1108 (authority to operate business). Trustee appointment grounds: § 1104 . DIP financing: § 364 (post-petition financing); § 364(c) (super-priority and lien priming); § 364(d) (priming senior liens). Use of cash collateral: § 363(c) . Foundational case: In re Heatron, Inc. , 6 B.R. 493 (Bankr. W.D. Mo. 1980) (DIP fiduciary duties). DIP rights and duties, § 1107 The DIP exercises trustee powers under § 1107 with limited exceptions: (1) operate the business , under § 1108; (2) use, sell, or lease property , ordinary course without court approval; non-ordinary requires § 363 motion; (3) obtain credit , under § 364; (4) assume or reject executory contracts , under § 365; (5) avoid preferential and fraudulent transfers , under §§ 547, 548, 549; (6) fiduciary duties to estate and creditors, including duty of loyalty, duty of care. The DIP typically has same management as pre-petition (with possible new CRO, Chief Restructuring Officer). When trustee replaces DIP Section 1104 permits trustee appointment for cause: (1) fraud, dishonesty, incompetence, or gross mismanagement by current management; (2) cause generally; (3) interests of creditors and equity ; (4) upon request of US Trustee . Trustee appointment is rare in modern Chapter 11; most cases proceed with DIP throughout. Examiner appointment (§ 1104(c)) is more common, investigates specific allegations without taking management role. Recent cases (Enron, FTX) have featured trustee appointments. DIP financing, § 364 Section 364 permits post-petition financing with various priority levels: (1) § 364(a) , ordinary course unsecured credit; administrative expense priority; (2) § 364(b) , non-ordinary course unsecured; administrative expense priority with court approval; (3) § 364(c)(1) , super-priority administrative expense; (4) § 364(c)(2) , secured by unencumbered property; (5) § 364(c)(3) , junior lien on encumbered property; (6) § 364(d) , priming senior liens (most aggressive). Each level requires increasingly strong showing of necessity. DIP financing is typically negotiated heavily with senior secured creditors. Cash collateral use Cash collateral (cash subject to secured creditor liens) requires special treatment under § 363(c)(2): (1) creditor consent ; OR (2) court order after notice and hearing. Cash collateral disputes are among first issues in Chapter 11, debtor needs cash to operate; secured creditor wants protection. Standard resolution: budget-based use with adequate protection (cash payments, replacement liens, equity cushion). Cash collateral order is typically the first major Chapter 11 order. DIP fiduciary duties The DIP owes fiduciary duties to all creditors and the estate: (1) duty of loyalty , undivided loyalty to creditors and estate; conflicts of interest must be disclosed; (2) duty of care , reasonable diligence in business operation; (3) duty to maximize estate value ; (4) duty to disclose , reporting to court, US Trustee, creditors. Breach of fiduciary duty exposes management to personal liability and can support trustee appointment. Sophisticated DIPs maintain proper governance, conflicts policies, and documented decision-making. Practical context For Texas Chapter 11 debtors, effective DIP operation requires preparation. Best practice: (1) engage experienced bankruptcy counsel and financial advisor; (2) consider Chief Restructuring Officer for credibility; (3) maintain detailed cash flow forecasts and reporting; (4) negotiate cash collateral agreements with secured creditors before filing; (5) prepare DIP financing strategy if needed; (6) maintain governance discipline, board oversight, conflicts management; (7) communicate with creditors transparently; (8) prepare 13-week cash flow forecasts as standard practice. For creditors: (1) review DIP financing motions carefully, often have substantial roll-up provisions; (2) participate in cash collateral negotiations; (3) monitor DIP reporting for irregularities; (4) move for trustee or examiner appointment where appropriate. Related Terms Chapter 11 · Section 363 Sale · Plan of Reorganization · Automatic Stay · Workout and Restructuring Deceptive Trade Practices Act (DTPA) § 2025 Texas's principal consumer-protection statute, codified at Tex. Bus. & Com. Code §§ 17.41-17.63. Provides four causes of action, false/deceptive practice (the "laundry list"), breach of express or implied warranty, unconscionable action, and Insurance Code Chapter 541 violation. Available to "consumers" (with a $25M business-consumer exclusion). Remedies include economic damages, mental anguish (knowing violations), treble damages (intentional violations), and mandatory attorney's fees. SB 140 (eff. September 1, 2025) expanded the DTPA to cover text-message marketing violations. The Texas Deceptive Trade Practices–Consumer Protection Act (DTPA) is Texas's principal consumer-protection statute and one of the most powerful in the United States. It provides consumers with four distinct causes of action against deceptive business practices, with remedies including economic damages, mental anguish damages for knowing violations, treble damages for intentional violations, and mandatory attorney's fees for prevailing consumers. The DTPA originated in 1973 and was substantially narrowed by 1995 tort-reform amendments; it has been revisited periodically, most recently with SB 140 (effective September 1, 2025) expanding coverage to text-message marketing violations. Authority Texas DTPA: Tex. Bus. & Com. Code Ch. 17, Subch. E : §§ 17.41-17.63 . Purpose and liberal construction: § 17.44 . Definitions including "consumer": § 17.45 . The "laundry list" of deceptive practices: § 17.46(b) . Causes of action: § 17.50(a) . Damages: § 17.50(b) . Mandatory pre-suit notice: § 17.505 . Statutory exemptions including professional services: § 17.49 . Statute of limitations (2 years): § 17.565 . Attorney's fees: § 17.50(d) . Recent expansion: SB 140 , 89th Leg. (2025), eff. Sept. 1, 2025 (text-message marketing). Foundational case: Woods v. Littleton , 554 S.W.2d 662 (Tex. 1977). The four causes of action Section 17.50(a) provides four distinct DTPA claims: (1) laundry-list violation , use of a false, misleading, or deceptive practice specifically listed in § 17.46(b); requires consumer reliance and producing causation of damages; (2) breach of express or implied warranty , including warranties under the UCC and Magnuson-Moss Warranty Act; (3) unconscionable action , defined in § 17.45(5) as an act that takes advantage of the consumer's lack of knowledge, ability, experience, or capacity to a grossly unfair degree; (4) Insurance Code Chapter 541 violation , incorporated by reference. Each claim is independently actionable; conduct may violate one or several. The "consumer" requirement DTPA standing requires "consumer" status. Section 17.45(4) defines consumer as an individual, partnership, corporation, or governmental entity that "seeks or acquires by purchase or lease, any goods or services" and where those goods or services form the basis of the complaint. Two principal consumer exclusions: (1) business consumers with $25 million or more in assets are excluded under § 17.45(10); (2) business consumers controlled by entities with $25 million or more in assets are similarly excluded. The exclusion limits DTPA to genuine consumers and small to mid-market business consumers, not large corporations. Pre-suit notice, the 60-day requirement Section 17.505 requires the consumer to provide written pre-suit notice at least 60 days before filing a DTPA claim for damages. The notice must (1) describe the consumer's complaint in reasonable detail; (2) state the specific amount of economic damages, mental anguish damages, and attorney's fees sought; and (3) be served on the defendant. Failure to provide proper notice generally results in abatement (rather than dismissal), but can also limit fee recovery. The pre-suit notice gives the defendant an opportunity to make a settlement offer; a rejected offer that proves to be reasonable can limit the consumer's damages and fees recovery. Damages and treble structure Section 17.50(b) provides the DTPA's distinctive damages structure: (1) economic damages , actual pecuniary loss; available on any successful DTPA claim; (2) mental anguish damages , available only for "knowing" violations (§ 17.50(b)(1)); (3) up to three times economic damages , for "knowing" violations (treble economic); (4) up to three times economic AND mental anguish damages , for "intentional" violations; (5) mandatory reasonable and necessary attorney's fees and court costs for prevailing consumers (§ 17.50(d)), non-discretionary. Defendants prevailing on groundless or harassment-purpose claims are also entitled to fees under § 17.50(c). The professional services exemption Section 17.49(c) exempts professional services, services whose essence is providing advice, judgment, opinion, or similar professional skill, from the DTPA. This shields doctors, lawyers, accountants, architects, engineers, and similar licensed professionals. Four exceptions to the exemption: (1) express misrepresentation of material fact; (2) failure to disclose information required under § 17.46(b)(24); (3) unconscionable act; (4) breach of express warranty. The exemption's scope is heavily litigated, claims that look like professional negligence are exempted, but claims based on specific misrepresentations or unconscionable conduct may proceed. SB 140, text message marketing (2025 expansion) Senate Bill 140, effective September 1, 2025, expanded the DTPA framework to include text-message marketing violations. The statute incorporates marketing text messages (SMS, MMS, and multimedia communications) into Texas's "telephone solicitation" framework under Tex. Bus. & Com. Code Ch. 302-304 and creates private rights of action for Texas residents under the DTPA for repeated violations. Penalties range from $500 to $5,000 per violation, and treble damages are available for knowing violations. The expansion stacks with federal TCPA exposure, businesses face dual federal and state liability for non-compliant marketing texts. Statute of limitations Section 17.565 imposes a 2-year statute of limitations on DTPA claims, running from (a) the date of the deceptive practice or (b) the date the consumer discovered or should have discovered the deceptive practice (the discovery rule applies). The 2-year period is shorter than most contract limitations (4 years) and most tort limitations (2-4 years), making prompt prosecution important. Practical context For Texas plaintiffs, the DTPA remains one of the most powerful consumer-protection tools in the country, particularly the mandatory attorney's fees (§ 17.50(d)) which incentivize even modest-damage claims. Best practice: (1) confirm consumer status (the $25M business-consumer exclusion is dispositive); (2) provide proper pre-suit notice with specific damages; (3) plead all four DTPA claim categories that fit the facts; (4) document the "knowing" or "intentional" elements for treble-damages exposure; (5) calendar the 2-year limitations window. For defendants: (1) the professional services exemption is a powerful first defense for licensed professionals; (2) groundless-claim fee shifting under § 17.50(c) provides meaningful counter-leverage; (3) the $25M business-consumer exclusion eliminates large-corporate claims entirely; (4) settlement-offer practice under § 17.505 can cap downstream damages exposure. Related Terms Warranty · Sanctions · Statute of Limitations · Attorney's Fees Recovery · Texas Data Privacy and Security Act Declaratory Judgment § A judicial determination of the rights, duties, or legal relations of parties without an order for any specific action or remedy. Allows judicial resolution of legal disputes without first incurring damage or breach. Texas Uniform Declaratory Judgments Act (Tex. Civ. Prac. & Rem. Code Ch. 37). A declaratory judgment is a judicial determination of the rights, duties, or legal relations of parties to a case, without an order for any specific action or remedy. Declaratory judgments allow parties to obtain judicial resolution of legal disputes without first incurring damage or breach. Texas's Uniform Declaratory Judgments Act provides the principal Texas statutory framework. Authority Texas Uniform Declaratory Judgments Act (UDJA), Tex. Civ. Prac. & Rem. Code Ch. 37 . Federal Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202 . Specific UDJA provisions: § 37.003 (general powers); § 37.004 (questions of construction); § 37.005 (effect of declaration); § 37.009 (attorney's fees). Permitted declarations Under § 37.004 , a party may obtain a declaration construing or determining rights under (1) deeds, wills, written contracts, or other writings constituting a contract; (2) statutes, ordinances, contracts, or franchises; (3) trusts. The relief is broad, virtually any legal-relationship question can be the subject of a declaratory action. Standing and ripeness requirements A declaratory judgment requires (1) a justiciable controversy between parties with adverse legal interests; and (2) the controversy must be sufficiently ripe, actual or imminent, not merely hypothetical. Texas courts decline to issue advisory opinions on hypothetical disputes. Attorney's fees (§ 37.009) A unique feature of UDJA actions: the court may award reasonable and necessary attorney's fees to either party as are equitable and just. This fee-shifting authority is broader than the prevailing-party fee statutes in many other contexts. Coercive remedies coupled with declaration A party may seek declaratory and coercive relief (damages, injunction) in the same action. The UDJA does not displace other remedies; it provides an additional mechanism. Practical context Declaratory judgments are common in insurance coverage disputes, contract-interpretation disputes, IP licensing disputes, and constitutional challenges to statutes. The UDJA's fee-shifting provision creates meaningful settlement leverage. Defendants facing potential claims often consider proactive declaratory actions to fix the forum and frame the issues. Companion article: Contract Disputes in Texas Related Terms Injunctive Relief · Choice of Law / Choice of Forum · Texas Business Court Declaratory Judgment Act § The Texas statute (Tex. Civ. Prac. & Rem. Code Ch. 37) and federal counterpart (28 U.S.C. § 2201) authorizing courts to declare the rights, status, and legal relations of parties without granting coercive relief. Used to obtain advance judicial determination of a question, contract interpretation, statutory rights, insurance coverage, without waiting for a breach or other crystallizing event. Discretionary fee-shifting available under § 37.009. The Texas Declaratory Judgment Act (TDJA) authorizes courts to declare the rights, status, and legal relations of parties without granting coercive relief, even where no breach has occurred. The TDJA is the principal vehicle for obtaining advance judicial determination of contract interpretation, statutory rights, insurance coverage, intellectual property scope, and similar questions where the parties need legal certainty before acting. Federal courts have parallel authority under 28 U.S.C. § 2201 (the federal Declaratory Judgment Act). Authority Texas Declaratory Judgment Act: Tex. Civ. Prac. & Rem. Code Ch. 37 : § 37.001 (definitions); § 37.002 (purpose, liberal construction); § 37.003 (power of courts to render); § 37.004 (subject matter, questions of construction or validity); § 37.005 (declarations of parties' rights involving instruments and statutes); § 37.006 (parties); § 37.008 (issuance of further relief based on judgment); § 37.009 (costs and reasonable attorney's fees). Federal counterpart: 28 U.S.C. §§ 2201-2202 . Justiciability requirement: Bonham State Bank v. Beadle , 907 S.W.2d 465 (Tex. 1995). The justiciability requirement A declaratory judgment requires a "justiciable controversy", a real and substantial controversy between parties having adverse legal interests, capable of being adjudicated by a present-fact-finder, such that the court can issue an effective judgment. The Texas Supreme Court has emphasized that declaratory relief is not appropriate for hypothetical questions, advisory opinions, or controversies that are too contingent to support concrete adjudication. The controversy must be ripe (sufficiently developed for judicial decision) but does not require an actual breach or completed harm, anticipating breach can support declaratory relief. Common applications Frequently invoked TDJA categories: (1) contract interpretation , parties dispute the meaning of a clause and need a binding interpretation before performing or breaching; (2) insurance coverage , insurers seek declarations that policies do not cover claimed losses; insureds seek declarations that they do; (3) statutory and regulatory rights , parties challenge the application of a statute or regulation; (4) real property rights , disputes over restrictive covenants, easements, mineral rights, boundary lines; (5) corporate governance , questions about authority of corporate officers, validity of board actions, derivative-suit standing; (6) employment , interpretation of restrictive covenants, severance terms, equity vesting; (7) intellectual property , patent and trademark scope. Discretionary fee-shifting under § 37.009 Section 37.009 provides that "[i]n any proceeding under this chapter, the court may award costs and reasonable and necessary attorney's fees as are equitable and just." Unlike § 38.001's mandatory fee recovery for prevailing claimants, § 37.009 fee recovery is discretionary, the court evaluates equitable factors and may award fees to either party (including the losing party in unusual circumstances). The discretionary nature of TDJA fees is both a feature (allowing flexibility) and a risk (less predictability than § 38.001 in contract cases). The reverse-engineering problem Texas courts have addressed the recurring problem of parties using declaratory-judgment claims to obtain attorney's fees that would not be available under § 38.001, for example, by recasting a breach-of-contract dispute as a declaratory action. The Texas Supreme Court has cautioned against allowing § 37.009 to become an end-run around § 38.001's specific limitations. Where the underlying dispute is essentially a contract claim, courts may decline TDJA fees as inappropriate, leaving the party to § 38.001 remedies. Federal-state parallels The federal Declaratory Judgment Act (28 U.S.C. § 2201) is procedurally similar to the TDJA but has been interpreted to permit greater judicial discretion to decline declaratory jurisdiction even in cases that meet the justiciability threshold (under the Brillhart abstention doctrine). State and federal declaratory actions on the same dispute can produce dueling jurisdiction issues; courts apply first-filed and forum-shopping doctrines to manage the conflict. Removable declaratory actions filed in state court face the same § 1441 framework as other state-court actions. Practical context For Texas businesses, the TDJA is most valuable when (1) the legal question is well-defined but performance or non-performance carries significant cost; (2) the opposing party is positioning for a future claim and the company wants to lock in a favorable judicial determination first; (3) the company wants the legal certainty of a binding adjudication before making a significant business decision. Best practice: (1) confirm the controversy is justiciable and not advisory; (2) consider whether TDJA fee shifting under § 37.009 is meaningfully better than § 38.001 (often it is not); (3) consider whether declaratory relief alone is sufficient or whether a coercive remedy is also needed; (4) be alert to "reverse declaratory" filing, counterclaims that recast routine contract disputes as TDJA actions can change fee dynamics. Related Terms Attorney's Fees Recovery · Injunctive Relief · Summary Judgment · Restrictive Covenant Deed § A written instrument transferring ownership of real property from grantor to grantee. Texas recognizes principal categories: general warranty deed (full title warranty), special warranty deed (warranty limited to grantor's ownership period), and quitclaim deed (no warranty; transfers only what the grantor has). Must satisfy statute of frauds and recordation rules. A deed is a written instrument transferring ownership of real property from a grantor to a grantee. Texas law recognizes several categories of deeds, distinguished by the nature and scope of the warranty of title that the grantor provides. The choice of deed type is a substantive risk-allocation decision; the warranty is essentially insurance against title defects existing at the time of conveyance. Authority Conveyances chapter: Tex. Prop. Code Ch. 5 : § 5.021 (writing requirement); § 5.022 (statutory short form); § 5.023 (implied covenants from "grant" or "convey"); § 5.024 (encumbrances). Statute of Frauds: Tex. Bus. & Com. Code § 26.01 . Recordation: Tex. Prop. Code Ch. 11-13 ; § 12.001 (instruments concerning real property must be recorded with county clerk to bind subsequent purchasers). General warranty deed A general warranty deed conveys property and warrants title against all defects arising before AND during the grantor's ownership period. The grantor typically provides six common-law covenants: seisin, right to convey, against encumbrances, quiet enjoyment, warranty, and further assurances. This is the strongest warranty available and the standard deed type for arm's-length sales of fee-simple title. Special warranty deed A special warranty deed warrants title only against defects arising during the grantor's ownership, not against defects predating the grantor's acquisition. Common in commercial transactions, fiduciary sales (estates, trusts), foreclosures, and certain corporate transactions. Buyers receiving special warranty deeds typically rely on title insurance for protection against pre-grantor defects rather than the deed warranty. Quitclaim deed A quitclaim deed conveys whatever interest (if any) the grantor possesses, with no warranty. Used for clearing clouds on title (e.g., a former spouse releasing potential community property interest), correcting title defects, transfers among related parties, or transfers where the grantor expressly disclaims any warranty. Title insurance underwriters often refuse to insure title transferred by quitclaim deed without additional documentation. Required elements To be effective, a Texas deed must (1) be in writing; (2) identify the grantor and grantee; (3) include words of conveyance ("grant," "convey," "transfer"); (4) describe the property with reasonable specificity (legal description, not just street address); (5) be signed by the grantor; and (6) be delivered to the grantee. To bind subsequent bona fide purchasers without notice, the deed must be recorded with the county clerk in the county where the property is located. Acknowledgment before a notary is required for recordation. Statutory short form Section 5.022 provides a statutory short form for warranty deeds. Use of the short form, with appropriate variations, is recommended best practice, it incorporates by operation of law all the standard common-law covenants without requiring the parties to draft each one. Custom-drafted deeds that omit or modify the statutory covenants must do so explicitly and clearly. Practical context For Texas commercial buyers, the practical question is rarely "what deed type", title insurance is the primary risk-protection mechanism, and the deed type matters mostly at the margins. The exception is contract negotiations where the seller insists on a quitclaim deed; the buyer should treat that as a meaningful flag suggesting the seller has reason to avoid warranting title. Estate and gift transfers within families, however, frequently use special warranty or quitclaim deeds without raising concern, context matters. Related Terms Title Insurance · Easement · Commercial Real Estate Purchase Agreement · Statute of Frauds · Representations and Warranties Deed of Trust § The principal instrument used in Texas to grant a security interest in real property for the benefit of a lender. The borrower (grantor) conveys legal title to a third-party trustee, who holds it in trust to secure the borrower's obligations to the lender (beneficiary). Distinct from a mortgage in mortgage-state jurisdictions; the deed of trust enables the nonjudicial foreclosure framework available in Texas. A deed of trust is the principal instrument used in Texas to grant a security interest in real property for the benefit of a lender. Despite its name, a deed of trust is not a deed in the conveyance sense, it is a security instrument that operates by conveying legal title to a third-party trustee, who holds it in trust to secure the borrower's obligations to the lender. The deed of trust is the Texas analog to the mortgage in mortgage-state jurisdictions, but its three-party structure enables the nonjudicial foreclosure framework that distinguishes Texas from many other states. Authority Texas foreclosure statute: Tex. Prop. Code Ch. 51 : § 51.0001 (definitions, including "trustee"); § 51.002 (sale of real property under contract lien, nonjudicial foreclosure procedures); § 51.003 (deficiency judgment); § 51.007 (trustee dismissal in litigation); § 51.0074 (trustee duties); § 51.009 (foreclosure-purchase "as is" without warranties). Statute of limitations: Tex. Civ. Prac. & Rem. Code § 16.035 . Recordation: Tex. Prop. Code § 12.001 . Texas Constitution homestead provisions: Tex. Const. art. XVI, § 50 (limitations on home equity loans and constitutional protections). Three-party structure Every Texas deed of trust involves three parties: (1) grantor , the borrower/property owner, who grants legal title to the trustee; (2) trustee , a neutral third party (typically an attorney or title company employee) who holds title in trust and conducts any foreclosure sale; (3) beneficiary , the lender, for whose benefit the trust is created. The trustee's role is dormant during ordinary loan performance, the borrower retains all practical incidents of ownership. Only on default does the trustee become active, exercising the contractual power of sale to conduct a foreclosure sale. Power of sale The defining feature of a Texas deed of trust is the power of sale, the trustee's contractual authority to sell the property at public auction without court involvement upon proper notice and default. This authority enables the nonjudicial foreclosure framework under Section 51.002, which is faster and less expensive than judicial foreclosure. The power of sale must be expressly granted in the deed of trust; without it, the lender's only recourse is judicial foreclosure (filing a lawsuit to obtain a court-ordered sale). Substitute trustees The deed of trust typically grants the lender the right to appoint a substitute trustee at any time, often via simple written instrument recorded with the county clerk. In practice, lenders almost always appoint substitute trustees, typically attorneys at the law firm handling the foreclosure, for the foreclosure process. Section 51.0001(7) defines "trustee" to include substitute trustees. Section 51.0074 limits trustee duties to those expressly stated in the security instrument and provides that trustees are not fiduciaries to the borrower. Required content A Texas deed of trust must (1) be in writing; (2) identify the parties; (3) describe the real property by legal description; (4) reference the underlying obligation (the promissory note) by date and amount; (5) include the power of sale; (6) be signed by the grantor; (7) be acknowledged before a notary for recording. Recording with the county clerk in the county where the property is located is essential to bind subsequent purchasers and lenders. Most modern Texas deeds of trust use the Fannie Mae/Freddie Mac uniform Texas instrument or a substantially similar template. Homestead and home-equity restrictions Texas constitutional homestead protections ( Tex. Const. art. XVI, § 50 ) place significant limits on residential deeds of trust. A homestead may be encumbered by a deed of trust only for specified purposes, purchase money, taxes, mechanic's liens (with constitutional formalities), home-equity loans (with strict procedural requirements including 12-day waiting period, 80% loan-to-value cap, single-loan limit, and judicial foreclosure requirement). Commercial property is not subject to homestead protections; commercial deeds of trust track the standard nonjudicial framework without constitutional overlays. Practical context For Texas commercial real estate borrowers and lenders, the deed of trust is the workhorse security instrument. The standard package at any commercial real estate closing includes a deed of trust granting the lender's lien, a promissory note evidencing the debt, and frequently a guaranty by the borrower's principals. The deed of trust's nonjudicial foreclosure mechanism makes Texas significantly more lender-friendly than judicial-foreclosure states, foreclosure can be completed in approximately 60-90 days from default rather than 6-18 months in judicial states. Borrowers should understand this foreclosure speed when negotiating cure periods and other protective provisions. Related Terms Promissory Note · Nonjudicial Foreclosure · Guaranty Agreement · Title Insurance · Deed · Acceleration Clause Default § The occurrence of an event specified in a credit agreement that entitles the lender to exercise contractual remedies, including acceleration, foreclosure, and assessment of default-rate interest. Two principal categories: payment defaults (failure to pay when due) and covenant defaults (breach of an affirmative, negative, or financial covenant). Many credit agreements distinguish "events of default" from defaults capable of cure within a grace period. A default in a credit agreement context is the occurrence of an event specified in the agreement that entitles the lender to exercise contractual remedies. Defaults fall into two principal categories: payment defaults (failure to pay principal, interest, fees, or other amounts when due) and non-payment defaults or covenant defaults (breach of an affirmative, negative, or financial covenant). Modern credit agreements typically distinguish between "default" (which may be cured) and "event of default" (which authorizes lender remedies). Authority Default and remedies are creatures of private contract. Texas common-law contract principles. Default-rate interest cap under Texas usury law: Tex. Fin. Code § 302.001 ; § 303.009 (18% ceiling). UCC default rules for secured transactions: Tex. Bus. & Com. Code § 9.601 et seq. Nonjudicial foreclosure procedures triggered by default: Tex. Prop. Code § 51.002 . Anti-deficiency and notice rules: Tex. Prop. Code § 51.003 ; § 51.005 . Default vs. event of default Modern credit agreements typically use a two-tier structure. A default is the underlying breach (e.g., a missed payment, a covenant breach) that becomes an event of default upon (1) expiration of any applicable grace period without cure; (2) failure to cure following lender notice; or (3) immediate ripening for non-curable defaults like bankruptcy. The distinction matters because lender remedies, acceleration, foreclosure, default-rate interest, are typically triggered only by an event of default, not a default within the cure period. Common payment defaults Standard payment defaults include: (1) failure to pay principal at maturity or upon demand; (2) failure to pay interest on the scheduled date; (3) failure to pay fees, costs, or expenses when due; (4) failure to pay amounts due upon acceleration. Grace periods (often 5-10 days) typically apply to interest and fee defaults but not principal-at-maturity defaults. Most credit agreements distinguish principal defaults (immediate) from interest and fee defaults (grace period). Common covenant defaults Standard covenant defaults include: (1) breach of affirmative covenant (after notice and cure); (2) breach of negative covenant (immediate); (3) failure to satisfy a financial covenant for a measurement period; (4) breach of representation or warranty discovered post-closing; (5) bankruptcy, insolvency, or general assignment for the benefit of creditors; (6) cross-default on other indebtedness above a threshold; (7) judgments above a threshold not satisfied or stayed; (8) ERISA events; (9) change of control; (10) material adverse change. Lender remedies on event of default Standard lender remedies upon event of default include: (1) acceleration , declaring the entire balance immediately due; (2) default-rate interest , increased interest rate (typically 2-5% above the regular rate); (3) termination of commitments , stopping further advances under revolving facilities; (4) cash collateralization , requiring deposit of cash equal to outstanding letters of credit; (5) foreclosure on collateral , exercising rights under deeds of trust, security agreements, or pledges; (6) setoff , applying deposit accounts and other amounts owed to the borrower against the loan; (7) specific enforcement , seeking equitable relief; (8) attorney's fees and costs , recoverable under standard credit-agreement provisions. Cure rights and waiver Many credit agreements provide structured cure rights: (1) monetary defaults , cure by payment within stated grace period; (2) covenant defaults , cure by remediation within stated period; (3) financial-covenant equity cures , cure by equity contribution; (4) limited reset rights , opportunity to remediate consecutive breaches. Lender waiver of a default is enforceable but does not waive subsequent defaults; written waivers should be carefully scoped. Course-of-conduct waivers (lender accepting late payments without objection) can create estoppel arguments under Texas law. Practical context For Texas borrowers facing default, the playbook is: (1) understand the cure rights and timing under the credit agreement; (2) communicate proactively with the lender, most workouts begin with a candid conversation, not litigation; (3) preserve documentation of any course-of-conduct waivers; (4) understand the lender's likely remedy preferences (banks often prefer payment plans and collateral preservation over forced liquidation); (5) consider engaging counsel before, not after, the lender takes action. For lenders, default management requires balancing the value of preserving the relationship against the risk of further deterioration; default-rate interest, fees, and amendment opportunities often produce better economic outcomes than foreclosure. Related Terms Acceleration Clause · Promissory Note · Guaranty Agreement · Deed of Trust · Covenant (Financial) · Nonjudicial Foreclosure Deficiency Judgment § A money judgment for the difference between the debt outstanding and the proceeds of foreclosure sale, when those proceeds are insufficient to satisfy the debt. Texas Property Code § 51.003 provides specific procedures and timing for deficiency suits after nonjudicial foreclosure of real property, including a fair-market-value offset right available to the borrower as a defense. A deficiency judgment is a money judgment for the difference between the debt outstanding (principal, interest, fees, costs) and the proceeds of foreclosure sale, where those proceeds are insufficient to satisfy the debt. The deficiency represents the personal liability of the borrower (and any guarantors) that survives the foreclosure sale. Texas Property Code § 51.003 governs deficiency suits following nonjudicial foreclosure of real property and provides borrowers a critical fair-market-value offset right. Authority Deficiency after nonjudicial foreclosure: Tex. Prop. Code § 51.003 (suit for deficiency must be brought within two years of the foreclosure sale; borrower may request fair-market-value determination). Judicial foreclosure deficiency: § 51.004 . Deficiency after judgment against guarantor: § 51.005 . Statute of limitations: Tex. Civ. Prac. & Rem. Code § 16.035 (four years from accrual). UCC sale of personal property collateral: Tex. Bus. & Com. Code § 9.615 (deficiency or surplus from disposition). Two-year deficiency suit limitation Section 51.003 imposes a two-year limitation on deficiency suits following nonjudicial foreclosure of real property, substantially shorter than the four-year general statute of limitations for contract actions. The two-year clock runs from the date of the foreclosure sale. A lender that fails to file a deficiency action within two years loses the claim entirely. This is an unusual and lender-unfriendly statute compared to most states; it reflects a Texas legislative judgment that nonjudicial foreclosure should be a relatively final remedy. Fair-market-value offset Section 51.003(b)-(c) provides borrowers a critical defense to deficiency claims: the right to request a court determination of the fair market value of the foreclosed property at the time of the sale. If the fair market value exceeds the foreclosure sale price, the borrower receives credit for the higher fair market value, reducing the deficiency. This protects borrowers from collusive or below-market foreclosure sales, where lenders or affiliated bidders acquire property at a discount and then pursue large deficiency claims. The fair-market-value mechanism essentially imposes a duty of commercial reasonableness on foreclosure sales. Procedure for fair-market-value determination The borrower must request fair-market-value determination in the deficiency suit. The court determines fair market value based on competent evidence, typically including (1) appraisal testimony; (2) recent comparable sales; (3) the property's income-producing capacity; (4) market conditions at the time of sale. The borrower bears the burden of establishing fair market value above the sale price. Successful fair-market-value challenges can substantially reduce or eliminate deficiency liability. Guarantor liability Section 51.005 extends similar fair-market-value protections to guarantors. A guarantor sued on a deficiency may request fair-market-value determination just as the primary borrower could. This protection is non-waivable by the guaranty's terms, guaranty provisions purporting to waive § 51.005 protections have been held unenforceable. Guaranty drafting in Texas must take this into account; broad-form "absolute and unconditional" guaranty language does not eliminate the fair-market-value defense. UCC personal-property collateral For personal property collateral disposed of under UCC Article 9, the deficiency framework is governed by Section 9.615 (rather than Property Code § 51.003). The UCC requires "commercially reasonable" disposition; a disposition that is not commercially reasonable can result in elimination or limitation of the deficiency under the rebuttable-presumption rule (§ 9.626). The "low-price" defense under UCC Article 9 and the fair-market-value defense under Property Code § 51.003 are conceptually similar but procedurally distinct. Practical context For Texas commercial borrowers facing potential deficiency liability after foreclosure, the fair-market-value offset is the principal defensive tool. Best practice: (1) preserve evidence of the property's fair market value at the time of foreclosure (appraisals, market data, broker opinions); (2) calendar the lender's two-year deficiency-suit deadline; (3) raise fair-market-value defense promptly when sued; (4) consider counterclaims for wrongful foreclosure where appropriate. For lenders, deficiency planning should occur before foreclosure: (1) obtain a current appraisal; (2) avoid bidding too far below fair market value (which simply reduces the recoverable deficiency); (3) consider whether short sales or deeds in lieu produce better economic outcomes than foreclosure plus deficiency; (4) calendar the two-year deadline for deficiency suit. Related Terms Nonjudicial Foreclosure · Deed of Trust · Guaranty Agreement · Promissory Note · Default Deposition § The oral examination of a witness under oath, conducted out of court but on the record. Principal mechanism for obtaining detailed witness testimony before trial and for preserving testimony of witnesses unavailable at trial. A deposition is the oral examination of a witness under oath, conducted out of court but on the record (typically by court reporter, often video-recorded). Depositions are the principal mechanism for obtaining detailed witness testimony before trial and for preserving testimony of witnesses unavailable at trial. Authority Tex. R. Civ. P. 199 (depositions on oral examination); 200 (depositions on written questions); 201 (depositions in foreign jurisdictions); 202 (pre-suit depositions to investigate or perpetuate testimony); 203 (signing, certification, use). Federal: Fed. R. Civ. P. 30; 31 . Categories of depositions Oral depositions: the standard format. Counsel asks questions, the witness answers under oath, the court reporter transcribes. Depositions on written questions: questions are submitted in writing and read by an officer to the witness. Limited use, mostly for records custodians and routine matters. Depositions of corporate parties ( TRCP 199.2(b)(1) ): the requesting party identifies topics; the responding entity designates one or more witnesses to testify on those topics. Pre-suit depositions ( TRCP 202 ): taken before suit is filed, either to investigate a potential claim or to perpetuate testimony of a witness who may become unavailable. Time and scope limits Under TRCP 199.5(c) , oral depositions are limited to six hours of examination per witness. The scope of permissible questions is the same as the broader discovery scope under TRCP 192 . Use at trial Deposition testimony may be used at trial: (1) for impeachment; (2) to refresh recollection; (3) as substantive evidence if the witness is unavailable; (4) for any purpose if the deponent is a party. Deposition transcripts are admissible at summary judgment. Practical context Depositions are typically the single most expensive component of discovery in commercial cases. Effective deposition practice involves substantial preparation, both preparing witnesses to testify and preparing examination outlines for opposing witnesses. Video depositions have largely replaced transcript-only depositions for key witnesses, given their effectiveness with juries. Related Terms Discovery · Summary Judgment · Texas Rules of Civil Procedure Derivative Action § 2025 A lawsuit filed by a shareholder, member, or other equity holder on behalf of the entity itself, asserting a claim that belongs to the entity but that management has refused or failed to pursue. The principal procedural vehicle for challenging breaches of fiduciary duty. A derivative action is a lawsuit filed by a shareholder, member, or other equity holder on behalf of the entity itself , asserting a claim that belongs to the entity but that management has refused or failed to pursue. The plaintiff seeks recovery for the entity, not personally, except in narrow circumstances. Derivative actions are the principal procedural vehicle for challenging breaches of fiduciary duty by directors, officers, managers, or other governing persons. Authority For Texas corporations: Tex. Bus. Orgs. Code §§ 21.551–21.563 . For Texas LLCs: §§ 101.451–101.463 . SB 29 amendments effective May 14, 2025: new § 21.552(a)(3) (3% ownership threshold); new § 21.561(c) (attorney's fees limitation); new § 21.419 (codified business judgment rule). Definitive authority: Sneed v. Webre , 465 S.W.3d 169 (Tex. 2015); Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014). Standard procedure Standing. The shareholder must have been a shareholder at the time of the act or omission and must remain a shareholder throughout the proceeding. § 21.552(a)(1) . Demand requirement ( § 21.553 ). Before filing, a shareholder must serve written demand on the corporation stating the matter with particularity. The shareholder may not file until 91 days after demand, except where (a) the demand has been rejected, (b) the corporation is suffering irreparable injury, or (c) waiting would cause irreparable injury. Stay and committee dismissal ( §§ 21.554–21.555 ). The corporation may stay the proceeding and move to dismiss based on an independent committee's determination that the proceeding is not in the corporation's best interests. Closely held corporation exception The most consequential Texas derivative-action provision. For corporations with fewer than 35 shareholders and no public market under § 21.563 : (1) the demand requirement does not apply ( Sneed v. Webre , 465 S.W.3d at 178); (2) the committee-dismissal mechanism does not apply; (3) the court may order direct recovery to plaintiff shareholders if "justice requires" ( § 21.563(c) ); (4) the plaintiff may recover legal fees if the suit provided substantial benefit ( § 21.561(b) ). SB 29 changes (effective May 14, 2025) Ownership threshold for publicly-traded and opt-in corporations ( § 21.552(a)(3) ). For Texas corporations listed on a national securities exchange and corporations with 500+ shareholders that have opted into § 21.419 , the certificate or bylaws may require a minimum ownership threshold (capped at 3% of outstanding shares) to bring a derivative action. Attorney's fees limitation ( § 21.561(c) ). In a derivative proceeding involving a § 21.419 corporation, plaintiff's counsel may not recover fees if the proceeding's only outcome is amended shareholder disclosures. Heightened pleading. Under § 21.419 , claims against directors and officers of opt-in corporations must plead facts "with particularity" demonstrating fraud, intentional misconduct, ultra vires, or knowing violation of law. Double-derivative actions Sneed v. Webre held that, for closely held corporations, a shareholder of a parent corporation may sue derivatively on behalf of a wholly owned subsidiary against the subsidiary's officers and directors. LLC parallel TBOC Subchapter L of Chapter 101 ( §§ 101.451–101.463 ) provides parallel derivative-action provisions for Texas LLCs. The closely held LLC exception under § 101.463 substantially mirrors § 21.563 . Practical context Derivative actions are the primary courtroom vehicle for challenging fiduciary misconduct by Texas directors, officers, managers, and controlling owners. After Ritchie v. Rupe , derivative claims for breach of fiduciary duty became the principal route for minority shareholders. The closely-held-corporation exception under § 21.563 (and § 101.463 for LLCs) gives minority owners of small Texas businesses one of the most plaintiff-friendly derivative regimes in the United States. SB 29 has produced a sharp split, publicly-traded and opt-in corporations now face substantially heightened plaintiff burdens. Companion article: Business Divorces in Texas Related Terms Shareholder · Member · Director · Fiduciary Duty · Business Judgment Rule · Closely Held Corporation Director § 2025 An individual elected by shareholders to serve on the board of directors of a Texas corporation, with statutory and common-law authority to manage or direct the management of the corporation's business and affairs. A director is an individual elected by shareholders to serve on the board of directors of a Texas corporation, with statutory and common-law authority to manage or direct the management of the corporation's business and affairs. Directors owe fiduciary duties to the corporation; their conduct is protected by the business judgment rule when made within the rule's parameters. Authority Tex. Bus. Orgs. Code § 1.002 (defining "director"); Subchapter I of Chapter 21 ( §§ 21.401–21.418 ); § 21.401 (general management authority); § 21.402 (qualifications); § 21.403 (number of directors); § 21.418 (interested-director transactions); § 3.102 (good-faith reliance on experts); § 7.001 (charter exculpation); § 8.003 (indemnification); § 21.419 (codified business judgment rule, eff. May 14, 2025). The default management authority § 21.401(a) provides that the business and affairs of a corporation must be managed under the direction of, and subject to the authority of, the board of directors, except as provided in the corporation's certificate of formation, bylaws, or a shareholders' agreement. Qualifications, election, removal A director must be a natural person at least 18 years of age. § 21.402 . Directors need not be Texas residents and need not be shareholders. A Texas corporation must have at least one director. § 21.403 . Directors are elected by shareholders at each annual meeting ( § 21.405 ). Under § 21.409 , a director may be removed with or without cause by holders of a majority of shares entitled to vote. Fiduciary duties A director owes fiduciary duties to the corporation, not to individual shareholders, under Texas common law. The three components are duty of care, duty of loyalty, and duty of obedience. Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014); Sneed v. Webre , 465 S.W.3d 169 (Tex. 2015). The Texas Supreme Court reformulated the duty of loyalty as "the dedication of [the director's] uncorrupted business judgment for the sole benefit of the corporation." Reliance on experts A director, in good faith and with ordinary care, may rely on information, opinions, reports, or statements prepared or presented by officers or employees, legal counsel, accountants, investment bankers, or other persons with professional expertise. § 3.102 . This statutory reliance protection materially affects the duty of care analysis. Charter exculpation Under § 7.001 , the certificate of formation may eliminate or limit a director's personal liability for monetary damages for an act or omission in the director's capacity as a director, except for liability for breach of duty of loyalty, intentional misconduct, knowing violation of law, unauthorized distributions, or improper personal benefit. This tracks Delaware DGCL § 102(b)(7) . Interested-director transactions Under § 21.418 , a contract or transaction between the corporation and one or more of its directors is not void or voidable solely because of the director's interest if the material facts are disclosed and (a) the transaction is approved by a majority of disinterested directors, (b) approved by holders of a majority of shares, or (c) the transaction is fair to the corporation. The codified business judgment rule (§ 21.419) Effective May 14, 2025, § 21.419 (added by SB 29) provides codified business judgment rule protections for directors of Texas for-profit corporations whose shares are listed on a national securities exchange and corporations that opt in. For directors of corporations governed by § 21.419 : (1) directors are presumed to have acted in good faith, on an informed basis, in furtherance of the corporation's interests, and in obedience to law and governing documents; (2) the presumptions are rebuttable, but rebuttal alone is insufficient, the plaintiff must additionally prove breach of duty involving fraud, intentional misconduct, ultra vires, or knowing violation of law; (3) pleading must be with particularity; (4) the protections apply across the duty of care, duty of loyalty, and duties pertaining to interested-party transactions. See Business Judgment Rule. Texas Business Court jurisdiction Director fiduciary-duty disputes are within the jurisdiction of the Texas Business Court when the amount in controversy exceeds $5 million. Tex. Gov't Code § 25A.004(b) , as amended by HB 40 effective September 1, 2025. For directors of publicly-traded Texas corporations, the Business Court has jurisdiction regardless of amount in controversy. Practical context Texas director practice in 2026 is a substantially different field than it was in 2014 (pre- Ritchie v. Rupe ) or in early 2025 (pre-SB 29). The combination of Ritchie 's limitation on shareholder oppression, the contractual flexibility of shareholders' agreements under Subchapter C, charter exculpation under § 7.001 , indemnification flexibility under § 8.003 , the codified business judgment rule under § 21.419 , the derivative-action ownership thresholds under § 21.552(a)(3) , and the Texas Business Court's specialized jurisdiction has produced a Texas corporate-governance environment that is substantially friendlier to directors than at any prior point in Texas corporate history. Directors of Texas corporations that have opted into § 21.419 face a meaningfully different liability landscape than directors of corporations that have not opted in. Related Terms Corporation · Shareholder · Fiduciary Duty · Business Judgment Rule · Derivative Action · Texas Business Court · Indemnification Directors and Officers (D&O) Insurance § Liability insurance protecting directors, officers, and the company itself from claims arising from acts in their corporate capacities. Standard structure: Side A covers individual directors and officers when the company cannot indemnify (insolvency, statutory bar); Side B reimburses the company for permitted indemnification; Side C covers the entity directly for securities claims. Critical for attracting board talent, raising capital, and protecting against shareholder litigation, regulatory investigations, and bankruptcy. Directors and Officers (D&O) Insurance is liability insurance protecting directors, officers, and (in most modern policies) the company itself from claims arising from acts in their corporate capacities. D&O is essential for attracting independent directors, raising capital from sophisticated investors, and protecting individuals against personal liability from securities litigation, regulatory investigations, derivative actions, employment claims by senior executives, and similar exposures. The standard tripartite structure (Side A, Side B, Side C) divides coverage among the directors/officers personally, the company's reimbursement obligation, and entity-level securities exposure. Authority D&O insurance is a specialty market product without a single standard form. Texas indemnification framework: Tex. Bus. Orgs. Code §§ 8.101-8.105 (corporate indemnification); §§ 8.151-8.152 (insurance and other indemnification arrangements); § 8.105 (advancement of expenses). Federal securities exposure: Securities Act of 1933 §§ 11, 12(a)(2); Securities Exchange Act of 1934 §§ 10(b), 14(a), 16(b); SEC Rule 10b-5. Bankruptcy interaction: 11 U.S.C. § 524(g) and case law on D&O coverage in bankruptcy. Texas Supreme Court guidance on indemnification and insurance: Burrow v. Arce , 997 S.W.2d 229 (Tex. 1999); various decisions on Side A coverage. The Side A / Side B / Side C structure Standard D&O policies provide three distinct coverages: (1) Side A, Direct Coverage for Insured Persons : covers directors and officers directly when the company cannot indemnify them, typically due to insolvency, derivative-suit settlement (where the company is the plaintiff and cannot indemnify the defendant), or statutory bars. Side A is "the most important coverage" for individual directors because it functions when corporate indemnification fails. (2) Side B, Corporate Reimbursement : reimburses the company for permitted indemnification of directors and officers under corporate indemnification provisions or statutes. (3) Side C, Entity Coverage : covers the company itself for securities claims (typically only in public-company policies; private-company policies often include broader entity coverage). Texas indemnification framework Texas Business Organizations Code §§ 8.101-8.105 establish the corporate indemnification framework. Mandatory indemnification (§ 8.051) applies to fully successful directors. Permissive indemnification (§ 8.101) applies to other situations meeting good-faith and reasonable-belief standards. Companies may purchase D&O insurance even where indemnification is otherwise prohibited (§ 8.151). Most Texas corporations include broad indemnification provisions in their certificates of formation and bylaws, providing maximum permitted indemnification. D&O insurance backstops these obligations and fills gaps where indemnification is unavailable. See Indemnification (Corporate) . Common claim categories D&O claims typically arise from: (1) securities class actions , federal and state securities law claims against public companies; (2) derivative actions , shareholder claims on behalf of the corporation against directors; (3) regulatory investigations , SEC, DOJ, FINRA, state regulators; (4) M&A litigation , challenges to merger transactions, fairness, disclosure adequacy; (5) bankruptcy and insolvency , claims by trustees, creditors' committees against directors for fiduciary breaches; (6) employment practices , senior executive employment claims (separate from broader EPLI); (7) cyber-related , disclosure failures, oversight failures around cyber events; (8) antitrust , competitor and consumer class actions; (9) ERISA , claims related to benefit plan fiduciary duties. Public vs. private company D&O Public-company D&O focuses heavily on securities exposure and is subject to substantial premium and coverage volatility based on market conditions. Private-company D&O typically includes broader entity coverage and often combines D&O with EPLI, fiduciary liability, and other coverages in a "management liability" package. Pre-IPO companies should obtain D&O before any meaningful capital raise, investors often require D&O as a condition. Tail coverage (extended reporting period) is essential after IPO, M&A, or company dissolution. Common exclusions Standard D&O exclusions: (1) insured vs. insured , claims by one insured (the company, a director) against another (limits employer claims against former officers, with various carve-outs); (2) fraudulent or criminal acts , final adjudication required; (3) personal profit or advantage , illegal personal benefit; (4) prior knowledge , claims known before policy inception; (5) regulatory investigations , sometimes excluded from older policies (modern policies typically include); (6) bodily injury and property damage , routed to CGL; (7) professional services , routed to E&O; (8) ERISA , sometimes routed to fiduciary liability; (9) contract liability , typically excluded (entity-level only). Severability provisions typically prevent one insured's wrongdoing from voiding coverage for other insureds. Tail coverage (extended reporting period) D&O policies are typically claims-made, covering claims first made during the policy period regardless of when the underlying acts occurred (subject to retroactive date). When a policy ends without renewal (M&A, IPO, dissolution, change of carrier), the insured loses coverage for claims arising after termination, even if based on acts during the policy period. Tail coverage (also called "run-off" or "extended reporting period") preserves coverage for claims made during the tail period (typically 6 years post-transaction). Tail coverage is essential in: (1) M&A transactions, board members of acquired company; (2) IPO transactions, pre-IPO directors with continuing exposure; (3) Liquidation/dissolution, directors of dissolved entity; (4) Carrier change, gap protection during transition. Practical context For Texas commercial parties, D&O is essential for any company with a board, particularly with outside or independent directors. Best practice: (1) obtain D&O before raising capital from sophisticated investors, most VCs/PEs require it; (2) for public or pre-IPO companies, layer Side A excess (Side A only) above primary D&O for individual director protection; (3) maintain broad corporate indemnification in certificate of formation and bylaws to maximize Side B reimbursement; (4) review insured-vs-insured exclusion carefully, sophisticated policies have multiple carve-outs; (5) at any change-of-control transaction (M&A, IPO, dissolution), purchase 6-year tail coverage; (6) coordinate D&O with EPLI, fiduciary liability, and entity coverage to avoid gaps; (7) for private companies, consider management liability packages combining D&O + EPLI + fiduciary. Common gap: companies without dedicated Side A excess coverage leave individual directors exposed when primary D&O is exhausted by entity-level claims (Side C). Side A excess is relatively inexpensive and provides critical individual protection. Related Terms Indemnification (Corporate) · Fiduciary Duty · Derivative Action · Employment Practices Liability Insurance · Representations and Warranties Insurance Disclosure Schedule § The document in which the seller in an M&A transaction identifies specific facts, contracts, and circumstances that qualify or carve out exceptions to the seller's representations and warranties. Delivered with the purchase agreement. A disclosure schedule (or "schedules of exceptions") is the document in which the seller identifies specific facts, contracts, and circumstances that qualify or carve out exceptions to the seller's representations and warranties. The disclosure schedule is delivered with the purchase agreement and is generally negotiated in parallel with the reps and warranties themselves. Authority No statutory authority, disclosure schedules are creatures of contract. Texas contract law and the parties' purchase agreement govern interpretation. Structure Disclosure schedules are typically organized by reference to the section number of the corresponding rep, e.g., Schedule 4.10 (Material Contracts) lists the contracts being disclosed under § 4.10 of the agreement. Each scheduled item operates as an express carve-out: the rep is true except as disclosed on the schedule. Cross-reference effect Most modern Texas M&A agreements include a "general cross-reference" provision, under which an item disclosed on any schedule is deemed disclosed on every other schedule to which the disclosure is reasonably apparent on its face. This protects the seller from being deemed to have made an inaccurate rep merely because the disclosure landed under one heading instead of another. Hidden disclosure problem Sellers occasionally use voluminous disclosure schedules to bury material adverse information among routine disclosures. Sophisticated buyers respond with: (1) requirements that disclosures be sufficiently detailed to make the disclosed matter reasonably apparent; (2) "data-room dump" exclusions that exclude items merely uploaded to the data room; and (3) anti-sandbagging-resistance clauses preserving claims regardless of disclosure. Practical context The disclosure schedule is the locus of most pre-closing negotiation hostility, every item the seller wants to disclose, the buyer wants to either reject (forcing a stronger rep), require a special indemnity for, or extract a purchase-price concession against. A well-drafted disclosure schedule simultaneously protects the seller from indemnification exposure and is sufficiently transparent to satisfy the buyer's diligence. Companion article: Selling Your Business in Texas Related Terms Representations and Warranties · Due Diligence · Indemnification (M&A) · Sandbagging Discovery § The pretrial process by which parties obtain information from each other and from non-parties relevant to the case. Texas operates a three-tier discovery framework that adjusts the scope and duration of discovery based on case type. Discovery is the pretrial process by which parties obtain information from each other and from non-parties relevant to the case. Discovery serves to develop evidence for trial, narrow disputed issues, evaluate settlement, and prevent trial-by-ambush. Texas operates a three-tier discovery framework that adjusts the scope and duration of discovery based on case type. Authority Tex. R. Civ. P. 190 (discovery levels); 192 (scope and limits); 193 (responding to written discovery); 194 (initial disclosures); 195 (expert discovery); 196 (requests for production); 197 (interrogatories); 198 (requests for admission); 199 (depositions). Federal: Fed. R. Civ. P. 26–37 . Three Texas discovery levels (TRCP 190) Level 1 (default, small cases): suits for monetary damages of $250,000 or less. 50 hours of depositions per side. 25 interrogatories per side. Discovery period of 6 months from earlier of service or appearance. Level 2 (default for larger cases): suits not within Level 1 or Level 3. 50 hours of depositions per side. 25 interrogatories per side. Discovery period through trial date. Level 3 (court-ordered for complex cases): set by court order on motion or by agreement. Customized to case needs. The default for Texas Business Court matters. Scope of discovery (TRCP 192.3) Texas permits discovery of any matter not privileged, that is relevant to the subject matter of the pending action. Relevance is broadly construed, discovery need not be admissible at trial if reasonably calculated to lead to discovery of admissible evidence. The 2015 federal-rules amendments adopted a "proportionality" requirement; Texas has not formally adopted this language but similar principles apply through the trial court's case-management authority. Discovery devices Initial disclosures ( TRCP 194 ), automatic disclosure of basic case information. Interrogatories , written questions answered under oath. Requests for production , requests for documents and things. Requests for admission , requests that a party admit specified facts. Depositions , oral testimony under oath. Subpoenas , for non-party discovery. Privilege and work product Attorney-client privilege protects confidential communications between attorney and client. Work-product doctrine ( TRCP 192.5 ) protects materials prepared in anticipation of litigation. Both are subject to specific procedural requirements for assertion and waiver. Sanctions Failure to comply with discovery obligations may result in sanctions under TRCP 215 , ranging from cost-shifting and exclusion of evidence to default judgment in extreme cases. Practical context Discovery typically consumes the majority of pretrial litigation time and costs. The Texas three-tier system produces meaningful efficiency gains for smaller cases but provides little structure for complex commercial disputes (which default to Level 3). Sophisticated discovery practice involves early case assessment, focused written discovery before depositions, and proportionality awareness. Related Terms Deposition · Motion to Dismiss · Summary Judgment · Texas Rules of Civil Procedure Distribution § A transfer of cash or other assets from a Texas LLC to its members in their capacity as members. Distributions are how members receive the economic benefit of their investment, separate from compensation paid to a member-employee or amounts paid as repayment on a member loan. A distribution is a transfer of cash or other assets from a Texas LLC to its members in their capacity as members. Distributions are how members receive the economic benefit of their investment in an LLC, separate from compensation paid to a member-employee for services or amounts paid as repayment on a member loan. Authority Tex. Bus. Orgs. Code Subchapter E of Chapter 101: § 101.201 (allocation of profits and losses); § 101.202 (distribution in kind); § 101.203 (sharing of distributions); § 101.204 (interim distributions); § 101.205 (distribution on withdrawal); § 101.206 (prohibited distribution; duty to return); § 101.207 (creditor status); § 101.208 (record date). The default rules Allocation by contribution ( § 101.201 ). Profits and losses are allocated to each member based on the agreed value of that member's contribution, as stated in the LLC's records. Cash distributions only ( § 101.202 ). A member is entitled to demand a distribution only in cash, regardless of the form of the member's underlying contribution. Distributions according to contribution ( § 101.203 ). Distributions of cash and other assets are made to each member according to the agreed value of that member's contribution. Disproportionate distributions, common in real estate LLCs and waterfall-structured deals, must be expressly authorized in the company agreement. No interim distributions absent declaration ( § 101.204 ). A member is not entitled to demand a distribution before the LLC's winding up. Distributions are made only when the governing authority affirmatively declares them. Without an express provision in the company agreement, a member can be in an LLC with substantial profits and receive nothing for years. The prohibited distribution rule Even when authorized by the company agreement, an LLC may not make a distribution if, immediately after the distribution, the company's total liabilities (excluding certain liabilities described in subsection (b)) would exceed the fair value of the company's total assets. § 101.206 . This is the Texas LLC equivalent of the corporate insolvency test on dividend payments. A member who receives a prohibited distribution is, in certain circumstances, obligated to return it. Subsections (c-1) and (c-2), added effective September 1, 2021, authorize the LLC to determine asset values and liabilities by reference to financial statements prepared under GAAP, IFRS, the LLC's tax-return accounting method, or other accounting practices reasonable under the circumstances. Practical context Distributions are not the same as profit allocations. Allocation is the assignment of profit (or loss) to each member's capital account for tax purposes. Distribution is the actual transfer of money or property to the member. A member can be allocated $100,000 of profit (and owe tax on it) while receiving $0 in distributions, which is the "phantom income" problem that mature company agreements address through mandatory tax distributions. Among Texas LLCs, the default rules under Subchapter E are routinely modified, disproportionate distributions, mandatory tax distributions, distributions tied to performance hurdles, and waterfall structures are all standard in LLCs with passive investors. Companion article: Raising Capital in Texas Related Terms Limited Liability Company · Member · Capital Contribution · Company Agreement Due Diligence § The buyer's investigation of a target business before committing to a transaction, examining financials, operations, contracts, IP, regulatory compliance, litigation, employment, tax, and other material risk and valuation elements. Due diligence is the buyer's investigation of the target business before committing to a transaction, examining the target's financials, operations, contracts, intellectual property, regulatory compliance, litigation, employment matters, tax position, and other elements material to the buyer's valuation and risk assessment. Authority Due diligence is not statutorily required and is governed by the parties' transaction process. Specific statutory contexts impose specific diligence obligations: Tex. Tax Code § 111.020 (sales tax certificate of no tax due to avoid successor liability); IRC § 1060 (asset-allocation reporting); Securities Act due-diligence defenses. Categories of diligence Legal: corporate organization and good standing, contracts, IP , litigation , regulatory licenses, employment matters , real estate , environmental, data privacy. Financial: historical financial statements, quality of earnings analysis, working-capital normalization, debt-like items, indebtedness, capitalization. Tax: federal, state, sales/use, employment, property tax positions and exposures. Operational: customer concentration, supplier relationships, key employee retention, technology systems. Insurance: coverage adequacy, claims history, run-off requirements. Diligence and indemnification Due-diligence findings typically populate the seller's disclosure schedule. Issues identified in diligence may be: (1) addressed by purchase-price reduction; (2) addressed by specific indemnification (a "special indemnity"); (3) addressed by retained liability assignment; (4) addressed by escrow or holdback; or (5) sufficient to terminate the deal. Sandbagging implications A buyer who discovers a breach of representation during diligence and closes anyway may have its post-closing indemnification claim limited under an anti-sandbagging clause, and Texas law on the default rule (where the agreement is silent) is unsettled. See Sandbagging . Practical context Diligence quality directly affects representations and warranties insurance underwriting, indemnification scope, and post-closing dispute likelihood. The 2025 RWI market has heightened underwriter scrutiny of diligence quality. Inadequate diligence is a leading cause of post-closing disputes and indemnification claims. Companion article: Selling Your Business in Texas Related Terms Representations and Warranties · Disclosure Schedule · Indemnification (M&A) · Sandbagging · Letter of Intent E Earnest Money § A cash deposit made by the buyer at signing of a real estate purchase agreement, held in escrow by the title company or other escrow agent. Functions as both consideration for the contract and a liquidated-damages pool in the event of buyer default. Typically 1%-3% of purchase price in commercial transactions; refundable during due diligence, non-refundable thereafter. Earnest money is a cash deposit made by a buyer at signing of a real estate purchase agreement, held in escrow by the title company or other escrow agent during the contract period. Earnest money serves three functions: (1) consideration supporting the contract; (2) a tangible expression of buyer's good-faith commitment; and (3) the typical liquidated-damages pool in the event of buyer default. In commercial transactions, earnest money is typically 1%-3% of the purchase price, though deals with longer due diligence periods or speculative buyers may justify higher amounts. Authority Title company escrow handling: Tex. Ins. Code Ch. 2502 ; Texas Department of Insurance escrow rules. Real Estate Commission rules: 22 Tex. Admin. Code § 535.146 (deposit handling by license holders). Liquidated damages framework: Texas common law; Phillips v. Phillips , 820 S.W.2d 785 (Tex. 1991) (liquidated damages valid if reasonable and actual damages difficult to ascertain). Specific performance as alternative remedy: Stafford v. Southern Vanity Magazine, Inc. , 231 S.W.3d 530 (Tex. App.-Dallas 2007). Refundable vs. non-refundable The contract typically distinguishes a "refundable" period (the due diligence or feasibility period, during which buyer may terminate for any reason and receive earnest money refund) from a "non-refundable" period (after due diligence, where the deposit is at risk if buyer defaults). At closing, earnest money is applied to the purchase price. The transition from refundable to non-refundable is one of the most heavily negotiated terms in commercial real estate. Hard money structures In competitive markets, sellers may demand "hard money", earnest money that is non-refundable from contract signing, regardless of due diligence outcomes. Hard-money structures shift risk substantially to the buyer and are typically used to demonstrate the buyer's seriousness, deter competing bids, or compensate the seller for off-market commitment. Buyers accepting hard money should already have substantial due diligence completed before contract signing. Liquidated damages and forfeiture Most commercial real estate purchase agreements provide that buyer's default results in seller's retention of earnest money as liquidated damages, typically the seller's exclusive remedy. Texas courts enforce liquidated damages clauses if (1) actual damages are difficult to ascertain and (2) the amount is a reasonable forecast of damages, not a penalty. Excessive earnest money can be reclassified as an unenforceable penalty. Some agreements preserve seller's right to elect specific performance instead. Disputes and interpleader Disputes over earnest money release at termination are common. The escrow agent (typically the title company) is bound by the contract and the parties' joint instructions; if buyer and seller disagree, the title company will not release without (a) a fully executed release agreement, (b) a court order, or (c) interpleader filing. Interpleader litigation over earnest money is straightforward but routinely costs more than the deposit at issue, making negotiated resolutions almost always preferable. Practical context For Texas commercial real estate buyers, the earnest money negotiation is a critical leverage point. A well-structured agreement protects buyer's deposit during diligence while providing seller with credible commitment. Buyers should resist (1) hard money structures unless diligence is complete; (2) automatic forfeiture for technical defaults; (3) escrow agreements that authorize seller-only instructions to release. Sellers should demand (1) clear liquidated damages provisions; (2) enforceable termination triggers tied to specific events; (3) earnest money increases ("additional deposits") at defined milestones to test buyer commitment. Related Terms Commercial Real Estate Purchase Agreement · Liquidated Damages · Escrow · Title Insurance · Letter of Intent Earnout § A deferred component of M&A purchase price, payable to the seller after closing only if the target business achieves specified financial or operational milestones during a post-closing earnout period. Bridges valuation gaps between buyer and seller. An earnout is a deferred component of M&A purchase price, payable to the seller after closing only if the target business achieves specified financial or operational milestones during a post-closing earnout period. Earnouts bridge valuation gaps between buyer and seller, the buyer pays only if the business performs as the seller projected; the seller participates in upside that the buyer is unwilling to pay for upfront. Authority No statutory authority, earnouts are creatures of contract. Common metrics Revenue-based: earnout tied to gross revenue or specific product-line revenue over the earnout period. EBITDA-based: earnout tied to EBITDA targets, typically over 1–3 fiscal years post-closing. Milestone-based: earnout tied to discrete events (regulatory approval, customer count, specific contracts). Combination: most earnouts use multiple metrics to balance buyer and seller incentives. Earnout disputes Earnouts are the leading source of post-closing M&A disputes. Recurring problems include: (1) buyer business decisions that reduce earnout metrics (deferred sales, product discontinuation, allocation of corporate overhead); (2) accounting interpretation disputes (especially around EBITDA adjustments); (3) integration choices that disrupt earnout-period operations; (4) implied covenant of good faith and fair dealing claims when buyer conduct appears designed to reduce the earnout. Texas implied covenant of good faith Texas does not generally recognize a freestanding implied covenant of good faith and fair dealing in commercial contracts. English v. Fischer , 660 S.W.2d 521 (Tex. 1983). However, post-closing earnout disputes frequently invoke express covenants (commercially reasonable efforts, ordinary course of business operations) or fraud / fraudulent inducement claims when buyer conduct departs sharply from expected behavior. 2024–2025 market trends ABA's 2025 Private Target Deal Points Study reports earnout prevalence dropped to 18% of private deals (down from 26% in 2023), suggesting valuation gaps narrowed during the 2024–early 2025 period. Earnout structures became somewhat more buyer-favorable. Practical context Earnouts work best where the metric is genuinely measurable, the earnout period is short (12–18 months), and the buyer commits to operating principles that protect earnout achievability. Long, complex earnouts are predictable sources of litigation. Companion article: Selling Your Business in Texas Related Terms Indemnification (M&A) · Representations and Warranties · Disclosure Schedule · Escrow Easement § A non-possessory right to use another's real property for a defined purpose. Texas recognizes principal types: appurtenant easements (benefiting an adjacent dominant estate), easements in gross (benefiting an individual or entity, not a parcel), and prescriptive easements (acquired by adverse use). Created by express grant, reservation, implication, necessity, or prescription. An easement is a non-possessory interest in another's real property granting the holder a defined right to use the property for a specific purpose. The easement holder does not own the underlying property; the property owner retains all other rights consistent with the easement. Texas law recognizes a robust framework of easement types and methods of creation, with substantial body of case law on scope, abandonment, and termination. Authority General Texas common law on easements. Statutory references in Tex. Prop. Code Ch. 5 (conveyances). Statute of frauds for express easements: Tex. Bus. & Com. Code § 26.01 . Recordation: Tex. Prop. Code § 12.001 . Easements restricting firearms or alcoholic beverages prohibited: Tex. Prop. Code § 5.020 . Adverse possession statutes (foundation for prescriptive easements): Tex. Civ. Prac. & Rem. Code §§ 16.024-16.030 . Foundational case law: Drye v. Eagle Rock Ranch, Inc. , 364 S.W.2d 196 (Tex. 1962) (implied easement requirements); Othen v. Rosier , 226 S.W.2d 622 (Tex. 1950) (easement by necessity). Easement appurtenant vs. easement in gross An easement appurtenant benefits a specific parcel of land (the "dominant estate") and burdens another parcel (the "servient estate"). It runs with the land, both the benefit and burden transfer automatically with conveyances of the respective parcels. A typical example: a driveway easement allowing access from a landlocked parcel across a neighboring parcel. An easement in gross benefits a person or entity rather than a parcel, utility easements (electric, gas, telecommunications, water/sewer) are the classic example. Commercial easements in gross are transferable; personal easements in gross typically are not. Methods of creation Texas easements are created by: (1) express grant , written instrument satisfying statute of frauds and recordation; (2) express reservation , grantor reserves easement when conveying the burdened parcel; (3) implication , implied from the circumstances of severance, particularly where prior use was apparent, continuous, and necessary; (4) necessity , required where parcel becomes landlocked through severance; (5) prescription , adverse, exclusive, open and notorious, hostile, and continuous use for 10 years (analogous to adverse possession but for use rather than possession); (6) estoppel , based on representations and detrimental reliance. Scope and reasonable use The scope of an easement is determined by the granting instrument (for express easements) or by the surrounding circumstances and reasonable use (for non-express easements). A driveway easement granted "for ingress and egress" generally cannot be used for parking, storage, or business purposes beyond reasonable access. Disputes over scope are common when the dominant estate's use intensifies, e.g., a residential easement claimed for commercial development. Texas courts apply a "reasonable use" standard with substantial deference to the original purpose. Termination Easements may terminate by (1) expiration of stated term; (2) merger of dominant and servient estates under common ownership; (3) release; (4) abandonment (requires intent plus non-use); (5) prescription (adverse possession by the servient owner blocking the use for the prescriptive period); (6) frustration of purpose; or (7) court order. Mere non-use, without intent to abandon, does not terminate an easement under Texas law. Practical context For Texas commercial property buyers, easements are a routine title-commitment exception that warrants careful attention rather than rote acceptance. Buyers should (1) review every recorded easement instrument; (2) plot easements on the survey to confirm they don't impair planned use; (3) verify whether utility easements have width restrictions or building-setback effects; (4) confirm whether any easements have been abandoned through long non-use (potentially clearable through quiet-title action); and (5) negotiate with the seller for termination of unnecessary easements before closing. Related Terms Deed · Restrictive Covenant · Title Insurance · Commercial Real Estate Purchase Agreement EEOC Charge § A formal complaint filed with the U.S. Equal Employment Opportunity Commission (EEOC) alleging employment discrimination under federal law (Title VII, ADA, ADEA, GINA, EPA). Generally required as administrative prerequisite before filing federal-court suit on Title VII and similar claims. Filing deadline: 180 days from discriminatory act in most states; 300 days in deferral states (including Texas through TWC-CRD work-share). Triggers EEOC investigation, conciliation, and right-to-sue letter. An EEOC Charge is a formal complaint filed with the U.S. Equal Employment Opportunity Commission alleging employment discrimination under federal law, Title VII (race, color, religion, sex, national origin), the ADA, the ADEA, GINA, and the Equal Pay Act. Filing an EEOC charge is generally required as an administrative prerequisite before filing federal-court suit on Title VII and similar claims. The EEOC charge process serves multiple purposes: notice to the employer, EEOC investigation, conciliation opportunity, and (if no resolution) issuance of right-to-sue letter authorizing litigation. Authority Federal statute: 42 U.S.C. § 2000e-5 (Title VII enforcement). EEOC regulations: 29 C.F.R. Part 1601 . Filing deadlines: 42 U.S.C. § 2000e-5(e) (180 days standard; 300 days in deferral states). Texas deferral: TCHRA work-share agreement between EEOC and Texas Workforce Commission Civil Rights Division; Tex. Lab. Code Ch. 21 . Foundational cases: Alexander v. Gardner-Denver Co. , 415 U.S. 36 (1974); National Railroad Passenger Corp. v. Morgan , 536 U.S. 101 (2002) (continuing violations doctrine); Fort Bend County, Texas v. Davis , 587 U.S. 541 (2019) (exhaustion is non-jurisdictional but mandatory). Filing deadlines EEOC charge filing deadlines: (1) 180 days from the discriminatory act in standard states; (2) 300 days in deferral states (including Texas) where state has a parallel state-law agency with work-sharing agreement with EEOC. The Texas deferral arrangement extends Texas EEOC charges to the 300-day deadline. Late charges are barred; the deadline is strictly applied. The "continuing violations" doctrine permits inclusion of earlier acts that are part of an ongoing discriminatory pattern, but typically requires at least one discriminatory act within the deadline. The charge filing process EEOC charge process: (1) intake , charge filed with EEOC field office, online portal, or by mail; (2) charge processing ; (3) employer notice , EEOC notifies employer and requests position statement; (4) investigation ; (5) finding , "reasonable cause" or "no reasonable cause"; (6) conciliation , for reasonable-cause findings; (7) litigation or right-to-sue . Process typically takes 6-18 months but can extend longer. Right to sue letter The right-to-sue letter authorizes the charging party to file federal-court suit on Title VII, ADA, GINA, and EPA claims. Key procedural points: (1) 180-day rule , charging party can request right-to-sue letter 180 days after charge filing; (2) 90-day filing deadline , federal lawsuit must be filed within 90 days of right-to-sue letter receipt; (3) scope , lawsuit can only include claims raised in or reasonably encompassed by the charge; (4) ADEA exception , right-to-sue letter not strictly required for ADEA suits. The 90-day deadline is strict; failure to file within 90 days bars the federal claim. Texas Workforce Commission coordination Texas charges are work-shared between the EEOC and the Texas Workforce Commission Civil Rights Division (TWC-CRD). Charges filed with either agency are typically deemed filed with both. The work-share extends the EEOC filing deadline to 300 days in Texas. State-law claims under TCHRA require administrative exhaustion through TWC-CRD. Sophisticated charging-party counsel often dual-file to preserve all claims. Scope of subsequent litigation Federal-court lawsuits following EEOC charges are limited to claims that were "raised in or reasonably encompassed by" the charge. Common scope issues: (1) different protected classes ; (2) different employment actions ; (3) retaliation , generally must be separately charged; (4) continuing violations . Charges should be drafted broadly to preserve future litigation scope without being so general as to be deemed defective. Practical context For Texas employers and employees, the EEOC charge process is the essential gateway to most federal employment discrimination litigation. Best practice for employees: (1) calendar 300-day deadline carefully; (2) consider counsel before filing, charge drafting affects litigation scope; (3) draft charge broadly to encompass anticipated litigation theories; (4) request right-to-sue letter at appropriate time; (5) calendar 90-day federal-suit deadline strictly; (6) coordinate with TCHRA claims through TWC-CRD. Best practice for employers: (1) respond to charges promptly and completely; (2) prepare position statement carefully, admissions can affect later litigation; (3) cooperate with EEOC investigation appropriately; (4) consider settlement during conciliation phase; (5) preserve evidence relevant to charged conduct. Common pitfalls: employees missing 90-day federal-suit deadline after right-to-sue; employers making admissions in position statements that prove costly in litigation. Companion article: Before Firing an Employee Related Terms Title VII · Age Discrimination in Employment Act · Americans with Disabilities Act · Texas Commission on Human Rights Act · Texas Workforce Commission Employer Identification Number (EIN) § A nine-digit federal tax identification number assigned by the IRS to identify business entities for tax filing, employment, and banking purposes. Required for any entity with employees, partnerships, corporations, multi-member LLCs, and most fiduciary arrangements. Obtained by filing IRS Form SS-4 or applying through the IRS online portal. An Employer Identification Number (EIN) is a nine-digit federal tax identification number assigned by the Internal Revenue Service to identify business entities for tax filing, employment reporting, and banking purposes. Format: XX-XXXXXXX. Despite the name, an EIN is required for many entities that have no employees, including partnerships, corporations, multi-member LLCs, single-member LLCs that elect corporate tax treatment, trusts, and estates. The EIN is also colloquially known as the Federal Tax ID Number or Federal EIN. Authority Internal Revenue Code: 26 U.S.C. § 6109 (identifying numbers). IRS regulations: 26 C.F.R. § 301.6109-1 . Application form: IRS Form SS-4 (Application for Employer Identification Number). For Texas entities: a separate Texas Taxpayer Number (11-digit) is also issued by the Texas Comptroller for state tax purposes. Who needs an EIN An EIN is required for any entity that (1) has employees; (2) operates as a corporation or partnership; (3) files employment, excise, or alcohol/tobacco/firearms tax returns; (4) withholds taxes on income paid to a non-resident alien; (5) has a Keogh plan; or (6) is involved with certain types of organizations including trusts, estates, real estate mortgage investment conduits, nonprofit organizations, farmers' cooperatives, or plan administrators. Single-member LLCs without employees and disregarded for federal tax purposes may use the owner's Social Security Number instead, but most banks and lenders require an EIN regardless. Application process The IRS issues EINs through several channels: (1) online, fastest, immediate issuance via the IRS website, available to applicants with a valid Taxpayer Identification Number whose principal business is in the United States; (2) by mail or fax, IRS Form SS-4 submission with 4-week (mail) or 4-day (fax) processing; (3) by phone, for international applicants. There is no fee. The "responsible party", the natural person who controls, manages, or directs the entity, must be identified on the application with that person's individual SSN or ITIN. Common pitfalls Frequent EIN issues include: (1) applying before the entity is properly formed with the secretary of state, the IRS will issue an EIN before formation, which can create downstream record-keeping problems; (2) listing a non-individual as the responsible party, the IRS now requires an individual; (3) failing to update the IRS when the responsible party changes (Form 8822-B, due within 60 days); and (4) confusing the EIN with the state taxpayer number assigned by the Texas Comptroller, which is a separate identifier with separate administrative requirements. Practical context For Texas businesses, the practical formation sequence is: (1) form the entity with the Secretary of State (file Certificate of Formation); (2) obtain the EIN from the IRS; (3) register with the Texas Comptroller for franchise tax (and sales tax permit if selling taxable goods or services); (4) open business bank accounts; (5) make tax elections (S-corp Form 2553, if applicable, within 75 days). Skipping or reordering these steps creates compliance gaps that surface later as audit findings or banking-relationship problems. Related Terms Certificate of Formation · Corporation · Limited Liability Company · Texas Franchise Tax · S-Corporation Election Employment Agreement § A written contract between an employer and employee specifying the terms and conditions of employment, duration, compensation, duties, benefits, restrictive covenants, and termination rights. Principal mechanism for modifying the at-will default and incorporating noncompete and confidentiality obligations. An employment agreement is a written contract between an employer and an employee specifying the terms and conditions of employment, duration, compensation, duties, benefits, restrictive covenants, and termination rights. In Texas, written employment agreements are the principal mechanism for modifying the at-will default rule and for incorporating noncompete and confidentiality obligations. Authority General Texas contract law. Restrictive covenants subject to Tex. Bus. & Com. Code §§ 15.50, 15.501, 15.51, 15.52 . Wage payment terms subject to Tex. Lab. Code Ch. 61 (Texas Payday Law). Discrimination and equal employment subject to Tex. Lab. Code Ch. 21 and federal anti-discrimination statutes. Typical provisions (1) Position, duties, and reporting structure; (2) compensation (base salary, bonus structure, commissions, equity); (3) benefits eligibility; (4) duration (fixed-term or at-will with specified notice); (5) termination provisions (for cause, without cause, change of control); (6) severance terms (if any); (7) restrictive covenants (noncompete, nonsolicitation, confidentiality, IP assignment); (8) dispute resolution (arbitration, choice of law and venue). At-will modification A Texas employment agreement that does not specify a duration or termination standard preserves the at-will default. To modify at-will status, the agreement must contain specific language, typically a fixed term, a "for cause" termination requirement, or specified notice/severance obligations on termination without cause. Restrictive covenant integration The employment agreement is typically the "otherwise enforceable agreement" supporting noncompete and nonsolicitation provisions under § 15.50 . The employer's contractual promise to provide confidential information or specialized training (typically as a condition of employment) provides the consideration supporting the noncompete. Practical context Most rank-and-file Texas employees do not have written employment agreements, they are at-will by default. Written employment agreements are typical for executives, sales personnel with significant customer relationships, and roles involving access to trade secrets or specialized training. The agreement's restrictive-covenant provisions are often more consequential to the employer's competitive position than the compensation provisions. Companion article: Before Firing an Employee in Texas Related Terms At-Will Employment · Noncompete Agreement · Confidentiality Agreement · Severance Agreement · Trade Secret Employment Practices Liability Insurance (EPLI) § Liability insurance covering employment-related claims by current, former, and prospective employees, including wrongful termination, discrimination, harassment, retaliation, wage and hour, and similar claims. Typically includes defense costs and indemnification subject to retentions, sublimits, and exclusions. Essential for any employer; small employers especially benefit because employment claims are increasingly common and defense costs alone routinely exceed $50,000 even for non-meritorious claims. Employment Practices Liability Insurance (EPLI) is liability insurance covering employment-related claims by current, former, and prospective employees. Standard EPLI coverage includes wrongful termination, discrimination, harassment, retaliation, hostile work environment, wage and hour (with limitations), defamation, and similar employment-related claims. The product emerged in the 1990s in response to rising employment litigation; modern EPLI is essential coverage for any employer with more than a handful of employees. Defense costs alone routinely exceed $50,000-$100,000 for even non-meritorious claims, making EPLI economically essential. Authority EPLI is a specialty market product without a standard form. Underlying employment law exposure: federal, Title VII (Civil Rights Act of 1964), Age Discrimination in Employment Act (ADEA), Americans with Disabilities Act (ADA), Family and Medical Leave Act (FMLA), Fair Labor Standards Act (FLSA), Equal Pay Act, Pregnancy Discrimination Act, Genetic Information Nondiscrimination Act (GINA), Section 1981, NLRA. Texas, Tex. Lab. Code Ch. 21 (Texas Commission on Human Rights Act); Tex. Lab. Code Ch. 61 (Texas Payday Law); Sabine Pilot Service, Inc. v. Hauck , 687 S.W.2d 733 (Tex. 1985) (whistleblower protection). Recent federal: Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA, 2022), invalidates pre-dispute arbitration of sexual harassment claims. Coverage scope Standard EPLI covers claims by current, former, and prospective employees (and sometimes independent contractors and applicants) alleging: (1) discrimination , race, gender, age, disability, religion, national origin, sexual orientation, gender identity, etc.; (2) harassment , sexual harassment, hostile work environment, quid pro quo; (3) wrongful termination , termination violating public policy, contract, or statutory rights; (4) retaliation , adverse action for protected activity (whistleblowing, FMLA leave, workers' compensation claims, etc.); (5) failure to promote, demote, transfer ; (6) defamation , false statements about employees; (7) negligent hiring/supervision/retention ; (8) FMLA, ADA, ADEA claims; (9) breach of employment contract ; (10) employment-related invasion of privacy . Wage and hour coverage Wage and hour claims (FLSA misclassification, overtime violations, off-the-clock work) are increasingly common and expensive, class actions can result in eight- and nine-figure exposure. Standard EPLI typically EXCLUDES wage and hour liability, providing only defense costs (often sublimited) without indemnification. Some policies offer optional wage and hour coverage as a sublimit or endorsement. Sophisticated employers should evaluate wage and hour exposure separately and consider standalone wage and hour insurance for high-risk industries (retail, hospitality, healthcare, gig economy). Common exclusions Standard EPLI exclusions: (1) contractual liability , beyond statutory or common-law obligations; (2) workers' compensation, ERISA, OSHA , covered by specialty policies; (3) WARN Act mass layoff notice violations (some policies include); (4) punitive damages , varies by state law on insurability; (5) fines and penalties , typically uninsurable; (6) strikes, lockouts, labor disputes ; (7) fraudulent acts , typically requires final adjudication; (8) NLRA violations , labor relations claims; (9) immigration-related , I-9, E-Verify (some policies include). Coverage varies substantially among carriers. Texas-specific exposures Texas-based employers face several state-specific exposures EPLI addresses: (1) Texas Commission on Human Rights Act (TCHRA), state-law parallel to Title VII; mandatory administrative exhaustion; (2) Sabine Pilot whistleblower claims , Texas common-law cause of action for employees terminated for refusing to perform illegal acts; (3) Texas Payday Law , wage payment obligations; (4) Texas non-compete enforceability , Tex. Bus. & Com. Code § 15.50-52, raising claims for over-broad enforcement; (5) Texas Workers' Compensation , most Texas employers are non-subscribers (Texas is unique in permitting opt-out), creating non-subscriber liability covered separately. EPLI policies issued in Texas typically address these specifics through endorsements. Defense and settlement provisions EPLI provides defense costs subject to per-claim and aggregate limits. Most policies require insurer consent for material settlements, with "hammer clauses" allowing the insurer to limit coverage if the insured refuses to settle on terms the insurer considers reasonable. Soft hammer clauses allocate uncovered settlement costs (typically 50/50 or 80/20). Hard hammer clauses can shift all subsequent costs to the insured if reasonable settlement is rejected. Sophisticated negotiation can replace hard hammer with soft hammer or eliminate the clause entirely. EFAA impact (sexual harassment) The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA, 2022) invalidates pre-dispute arbitration agreements covering sexual harassment claims at the employee's election. Since 2022, employees can choose court litigation over arbitration for sexual harassment claims regardless of arbitration agreements. Practical EPLI implications: (1) sexual harassment claims may proceed in public court rather than confidential arbitration; (2) defense costs may increase due to public discovery; (3) reputational risk increases with public proceedings; (4) settlement leverage shifts toward plaintiffs. Policies issued post-2022 typically reflect EFAA exposure in pricing and underwriting. Coverage triggers EPLI is typically claims-made, covering claims first made during the policy period regardless of when the underlying conduct occurred (subject to retroactive date). The "claim" trigger is typically broader than litigation: includes EEOC charges, state agency complaints, demand letters, and similar formal employment claims. Notice timing is critical, late notice can void coverage. Best practice: report claims immediately upon receipt of any formal employment-related demand or charge, even if the claim appears non-meritorious. Practical context For Texas employers, EPLI is increasingly essential. Best practice: (1) carry EPLI for any employer with 10+ employees (smaller employers may bundle into general management liability package); (2) coordinate EPLI with D&O, many private-company D&O policies include some employment coverage; (3) negotiate hammer clauses to soft (50/50) or eliminate; (4) maintain compliant employment policies and practices, claims with HR documentation gaps are harder to defend; (5) review wage and hour coverage gap and consider standalone wage and hour insurance for high-risk operations; (6) for sexual harassment claims, recognize EFAA changes, pre-dispute arbitration may not stand; (7) report claims immediately, late notice voids coverage. Common gap: employers focused on big-ticket employment exposure (class actions, executive disputes) underestimate the volume of routine, single-plaintiff claims. EPLI defense costs alone justify the premium for most mid-market employers. Companion article: Before Firing an Employee Related Terms Workplace Discrimination · Wrongful Termination · Severance Agreement · Directors and Officers Insurance · Fair Labor Standards Act End User License Agreement (EULA) § A form license agreement governing the rights of an end user to install, access, and use a software product. Typically a non-negotiated take-it-or-leave-it contract delivered through click-wrap, shrink-wrap, or in-application acceptance. Distinct from the negotiated software license agreement used in commercial transactions. An End User License Agreement (EULA) is a form license agreement governing the rights of an individual end user to install, access, and use a software product. EULAs are typically non-negotiated, take-it-or-leave-it contracts delivered through click-wrap acceptance, shrink-wrap packaging, or in-application acceptance prompts. They are the consumer-facing analog of the negotiated commercial software license agreement. Authority Texas Uniform Electronic Transactions Act (UETA), Tex. Bus. & Com. Code Ch. 322 . Federal E-SIGN Act, 15 U.S.C. § 7001 . Copyright Act, 17 U.S.C. § 117 (limitations on exclusive rights for computer programs); § 109 (first sale doctrine, limited application to digital copies). Foundational Texas case: Recursion Software, Inc. v. Interactive Intelligence, Inc. , 425 F. Supp. 2d 756 (N.D. Tex. 2006) (enforcing software EULA). Typical EULA terms A standard EULA grants a non-exclusive, non-transferable, revocable license to install and use the software for internal purposes only. Common restrictions include prohibitions on (1) reverse engineering, decompiling, or disassembling; (2) sublicensing or redistribution; (3) removal of proprietary notices; (4) use beyond the licensed seat or device count; and (5) commercial use of consumer-licensed software. The license terminates automatically on breach. Enforceability EULAs delivered as click-wrap (with affirmative user assent before installation or first use) are generally enforceable in Texas. Browsewrap-style EULAs accessible only through hyperlink without affirmative user action face serious enforcement challenges. Shrink-wrap EULAs (terms inside the package, accepted by opening or installing) are enforceable when the existence of additional terms is conspicuously disclosed on the outside packaging or initial install screen. Limits on enforceability Even enforceable EULAs cannot contract around (1) the user's statutory right under 17 U.S.C. § 117 to make a backup copy; (2) certain implied warranties under the Texas Deceptive Trade Practices Act (DTPA) for consumer transactions; and (3) the developing line of unconscionability doctrine applied to one-sided arbitration and class-action waiver provisions. Pure entity-to-entity transactions are generally outside DTPA protection. Practical context Texas businesses distributing software to consumers should treat the EULA as a critical risk-management document, it is the only contract governing the relationship with thousands or millions of users. Best practice: present the EULA via click-wrap on first install, provide a meaningful opportunity to review, retain assent records, and update only with fresh assent on material modifications. EULAs distributed through enterprise sales channels are typically replaced or supplemented by a negotiated Software License Agreement . Related Terms Software License Agreement · Click-Wrap Agreement · License Agreement · SaaS Agreement · Warranty ERISA § The Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001 et seq.), the principal federal statute governing private-sector employee benefit plans, including retirement plans (401(k), pension) and welfare benefit plans (health, disability, life). Imposes fiduciary duties, vesting requirements, reporting obligations, claims procedures, and a comprehensive enforcement scheme. ERISA preempts most state laws "relating to" covered plans, among the broadest preemption doctrines in federal law. ERISA, the Employee Retirement Income Security Act of 1974, is the principal federal statute governing private-sector employee benefit plans. ERISA covers two principal plan categories: (1) pension plans , defined benefit plans, defined contribution plans (401(k), profit sharing); (2) welfare benefit plans , health, disability, life insurance, severance plans. ERISA imposes fiduciary duties, vesting requirements, reporting obligations, and claims procedures, with comprehensive federal enforcement. Most importantly for litigators, ERISA preempts state laws "relating to" covered plans, channeling most benefit-plan disputes into federal-law analysis. Authority Federal statute: 29 U.S.C. § 1001 et seq. (Employee Retirement Income Security Act of 1974). Title I (DOL): protections for employees. Title II (IRS): tax-related rules. Title IV: pension plan termination insurance (PBGC). Key provisions: § 1104 (fiduciary duties); § 1132 (civil enforcement); § 1144 (preemption, broadest in federal law). DOL regulations: 29 C.F.R. Part 2509 et seq. Foundational cases: Pilot Life Ins. Co. v. Dedeaux , 481 U.S. 41 (1987) (preemption); Aetna Health Inc. v. Davila , 542 U.S. 200 (2004) (complete preemption); Firestone Tire & Rubber Co. v. Bruch , 489 U.S. 101 (1989) (standard of review for benefit denials); Glenn v. MetLife , 554 U.S. 105 (2008) (conflict-of-interest in claim review). Plan categories ERISA covers two principal plan categories: (1) retirement (pension) plans , including defined benefit pensions, defined contribution plans (401(k), 403(b), profit-sharing, ESOP), and money purchase plans; (2) welfare benefit plans , group health insurance, dental, vision, disability, life insurance, severance plans, EAPs, and similar plans. Government plans, church plans, and certain other plans are exempted. Fiduciary duties ERISA imposes specific fiduciary duties on plan fiduciaries (trustees, plan administrators, investment managers, named fiduciaries): (1) duty of loyalty , act in the exclusive interest of plan participants and beneficiaries; (2) duty of prudence , act with the care, skill, prudence, and diligence of a prudent person; (3) duty to diversify , investment diversification to minimize large losses; (4) duty to follow plan documents ; (5) prohibited transactions , avoid self-dealing, conflicts of interest, transactions with parties in interest. Breach of fiduciary duty can result in personal liability for losses. The preemption doctrine ERISA preemption, 29 U.S.C. § 1144 , is among the broadest preemption provisions in federal law. ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA. The "relate to" test is expansive: state laws are preempted if they have a "connection with or reference to" ERISA plans. Common preempted state laws: state insurance bad-faith claims ( Pilot Life ); state fraud claims arising from benefit denials; state law actions for tortious interference with benefits. Saved from preemption: state laws regulating insurance, banking, securities (saving clause); generally applicable state criminal laws. The "deemer clause" prevents states from regulating self-funded ERISA plans through the insurance saving clause. Civil enforcement, § 1132 ERISA civil enforcement (§ 1132) provides specific remedies in federal court: (1) (a)(1)(B) , recover benefits, enforce rights, clarify rights to future benefits, most common claim; (2) (a)(2) , fiduciary breach claims for plan losses; (3) (a)(3) , equitable relief for ERISA violations; (4) (g) , discretionary attorney's fees. Federal courts have exclusive jurisdiction over most ERISA claims. ERISA remedies are limited compared to state-law alternatives, no compensatory damages for emotional distress, no punitive damages, no jury trials in most claims. The remedy limitations are a principal disadvantage of ERISA preemption for plaintiffs. Standard of review for benefit denials The standard of review depends on plan terms: (1) de novo review , default if plan does not grant discretion to administrator; (2) arbitrary and capricious / abuse of discretion , if plan grants discretionary authority ( Firestone v. Bruch ). Most ERISA plans grant discretionary authority; abuse-of-discretion is the typical standard. Glenn v. MetLife (2008) requires consideration of conflicts of interest as a factor when administrator both decides claims and pays benefits, common in self-insured plans. The deferential review standard makes plan-level claim denials difficult to overturn in litigation. Claims procedures ERISA imposes specific claims procedures ( 29 C.F.R. § 2560.503-1 ): (1) initial claim decision , within 90 days for disability, 30 days for health (with extensions); (2) denial notice , must include specific reasons, plan provisions, additional information needed, appeal rights; (3) internal appeal , typically 60 days for claimant; full and fair review by different reviewer; (4) final decision . Failure to exhaust internal appeals can bar litigation; failure to follow procedures by administrator can result in de novo review (loss of deference). Practical context For Texas employers, ERISA touches almost every benefit decision involving covered plans. Best practice: (1) ensure plan documents grant discretionary authority to administrators (preserves abuse-of-discretion review); (2) follow claims procedures rigorously; (3) coordinate fiduciary committees and document fiduciary decisions; (4) maintain compliance with reporting obligations (Form 5500, summary plan descriptions); (5) for self-funded plans, leverage preemption against state-law claims; (6) coordinate with COBRA, FMLA, ACA obligations. For employees and beneficiaries: (1) exhaust internal appeals before suit; (2) understand abuse-of-discretion vs. de novo review; (3) recognize ERISA's limited remedies (no jury, no compensatory/punitive damages); (4) preserve fiduciary breach theories where applicable. Common pitfall: parties pursuing state-law claims in benefit disputes, generally preempted, leaving the claim subject to ERISA's narrower remedy framework. Related Terms COBRA · Fiduciary Duty · Severance Agreement · Section 83(b) Election · Schedule K-1 Errors and Omissions (E&O) Insurance § Liability insurance protecting professional service providers against claims arising from errors, omissions, or negligent acts in the rendering of professional services. Also called Professional Liability Insurance. Covers attorneys, accountants, consultants, technology providers, real estate professionals, insurance agents, and other service-based businesses. Distinct from CGL, E&O covers economic loss from professional services; CGL covers bodily injury and property damage from operations. Typically claims-made. Errors and Omissions (E&O) Insurance, also called Professional Liability Insurance or Malpractice Insurance, protects professional service providers against claims arising from errors, omissions, or negligent acts in the rendering of professional services. The product is essential for any business whose services involve professional judgment, expertise, or specialized advice. E&O is distinct from CGL: E&O addresses economic loss from professional services (bad advice, defective software, inaccurate appraisals); CGL addresses bodily injury and property damage from operations (slip and fall, premises injuries). Most professional services businesses need both. Authority E&O is a specialty market product without a standard form across professions. Profession-specific frameworks: attorneys, state bar rules require malpractice insurance disclosure (Texas Disciplinary Rules of Professional Conduct, Rule 1.04); accountants, AICPA standards; physicians, state medical practice act and Texas Medical Liability Act ( Tex. Civ. Prac. & Rem. Code Ch. 74 ); architects/engineers, Texas Engineering Practice Act ( Tex. Occ. Code Ch. 1001 ); insurance agents, Texas Insurance Code; real estate, Texas Real Estate Commission rules. Texas tort law for professional services: Murphy v. Friendswood Dev. Co. , 576 S.W.2d 21 (Tex. 1978); standard of care requires the professional to exercise the skill and care customary among professionals in good standing. Common categories of professional liability Profession-specific E&O products: (1) lawyers , legal malpractice insurance; covers errors in advice, missed deadlines, conflicts; (2) accountants , accounting malpractice; covers tax preparation errors, audit failures, advisory errors; (3) medical professionals , medical malpractice; subject to Tex. Civ. Prac. & Rem. Code Ch. 74 caps and procedures; (4) architects and engineers , design professional liability; covers design defects, code violations, schedule failures; (5) technology providers , tech E&O; covers software defects, IT consulting errors, integration failures; often combined with cyber; (6) insurance agents and brokers , covers placement errors, coverage gaps, application misrepresentations; (7) real estate professionals , covers misrepresentation, disclosure failures, transactional errors; (8) financial advisors , covers investment advice, suitability errors, supervision failures; (9) consultants , covers strategic and operational advice errors. Standard coverage structure E&O policies typically include: (1) professional services definition , defines covered services; precision is critical (broad definitions provide more coverage); (2) per-claim limit , maximum payable per claim; (3) aggregate limit , maximum payable for all claims in policy period; (4) retention/deductible , insured's obligation per claim; (5) defense within or outside limits , whether defense costs erode the coverage limit (within) or are paid in addition (outside); (6) claims-made trigger , covers claims first made during policy period; (7) retroactive date , coverage extends back to this date for prior acts; (8) extended reporting period (tail), option for tail coverage at policy end. Common exclusions Standard E&O exclusions: (1) fraudulent or criminal acts , typically requires final adjudication; (2) known prior claims and circumstances , events known before inception; (3) contractual liability beyond what would exist absent contract; (4) express warranties and guarantees , affirmations of specific results; (5) insured vs. insured in some forms; (6) bodily injury and property damage , routed to CGL; (7) employment practices , routed to EPLI; (8) profit/personal advantage ; (9) regulatory fines and penalties , varies; (10) specific high-risk activities by profession (e.g., securities offerings for accountants without endorsement). The "claim" trigger E&O claims-made coverage requires (1) a claim first made during the policy period and (2) reported during the policy period (or extended reporting period). "Claim" is typically defined broadly: written demand for monetary or non-monetary relief, civil proceeding, criminal proceeding, regulatory proceeding. The first claim arising from related acts triggers coverage; all subsequent claims based on the same wrongful acts relate back to the first claim. This "interrelatedness" provision means a series of claims based on the same underlying act is treated as one claim for limits and retention purposes. Retroactive date and tail coverage E&O policies typically include a retroactive date, the date back to which the policy covers prior acts. Acts occurring before the retroactive date are not covered, even if the claim is made during the policy period. Tail coverage (Extended Reporting Period or ERP) extends the policy to cover claims made after the policy ends but for acts during the policy period (subject to retroactive date). Tail coverage is essential at: (1) carrier change (gap protection); (2) practice termination (retirement, dissolution); (3) M&A involving the practice; (4) any change of control. Tail coverage typically costs 100-300% of the annual premium for 1-3 years (longer tails available for additional premium). Texas Medical Liability Act overlay For medical professionals, Texas Civil Practice and Remedies Code Chapter 74 (Texas Medical Liability Act) imposes specific procedures: (1) pre-suit notice with expert report; (2) statute of repose (10-year outer limit); (3) damages caps on non-economic damages ($250,000 per claimant against physicians, $250,000 per institution, $750,000 institutional aggregate); (4) heightened pleading and proof requirements. Texas medical malpractice insurance typically incorporates these protections in defense and settlement strategy. Coordination with other policies E&O often coordinates with other coverages: (1) CGL for premises and operations exposure; (2) cyber for data and technology incidents (some policies combine tech E&O with cyber); (3) D&O for executive-level decisions; (4) EPLI for employment-related claims; (5) fiduciary liability for ERISA matters. For technology providers, "tech E&O combined with cyber" is increasingly the standard product, addressing both professional liability and cyber exposure in a single policy. Practical context For Texas professional services businesses, E&O is foundational. Best practice: (1) confirm precise scope of "professional services" definition, broad is better; (2) maintain consistent retroactive date through carrier changes; (3) at any change of control, M&A, or carrier change, evaluate tail coverage carefully, typical 6-year tail for transitions; (4) coordinate E&O with cyber for technology/professional services businesses; (5) for medical practitioners, ensure policy reflects Tex. Civ. Prac. & Rem. Code Ch. 74 framework; (6) for small/solo practitioners, evaluate per-claim and aggregate adequacy (claims often cluster); (7) for high-fee, high-stakes engagements, consider higher limits or excess. Common gap: professional services businesses with significant client engagements often carry E&O limits inadequate for largest matters. Limit adequacy should be evaluated against largest engagement potential exposure, not average matter size. Related Terms Commercial General Liability Insurance · Cyber Insurance · Directors and Officers Insurance · Limitation of Liability Clause · Statute of Limitations Escrow § An arrangement under which a portion of the M&A purchase price is held by a neutral third-party escrow agent for a specified period after closing, to fund post-closing indemnification claims by the buyer against the seller. Escrow is an arrangement under which a portion of the M&A purchase price is held by a neutral third-party escrow agent (typically a bank or specialized escrow service) for a specified period after closing, to fund post-closing indemnification claims by the buyer against the seller. The escrowed funds provide secure, immediate recovery for buyer claims without requiring litigation against the seller. Authority No statutory authority, escrows are creatures of contract, governed by the escrow agreement among the buyer, seller, and escrow agent. Sizing Traditional escrows: 5%–15% of purchase price held for 12–24 months. Modern RWI-driven structures: smaller escrows (often 0.5%–1% of EV) covering retention and specific known risks, with RWI providing the primary coverage above retention. Holdback distinguished A "holdback" is similar but retained by the buyer rather than by a neutral escrow agent. Holdbacks are mechanically simpler but expose the seller to buyer credit risk and create disputes over release timing. Escrows with reputable agents avoid both issues. Release mechanics Most escrow agreements provide: (1) automatic release of unreserved funds at the end of the survival period; (2) reserve mechanism for then-pending claims; (3) joint-instruction release; and (4) dispute-resolution procedures for contested claims. Practical context Escrows are standard in middle-market and lower-middle-market deals; large deals often dispense with escrows entirely in favor of RWI. The escrow agent's standard form agreement typically governs absent significant negotiation. Companion article: Selling Your Business in Texas Related Terms Indemnification (M&A) · Representations and Warranties · Earnout · Letter of Intent Estimated Tax Payments § Quarterly federal income tax payments made by individuals, partners, S-corp shareholders, and corporations whose tax liability is not fully covered by withholding. Required when the taxpayer expects to owe at least $1,000 (individuals) or $500 (corporations) at year-end. Underpayment triggers an interest-rate penalty under IRC § 6654 (individuals) or § 6655 (corporations). Estimated tax payments are quarterly federal income tax payments made by taxpayers whose tax liability is not fully covered by withholding. Individuals, including sole proprietors, partners, LLC members, and S-corporation shareholders, and C-corporations are both subject to estimated-tax obligations when their projected annual liability exceeds threshold amounts. Failure to pay sufficient estimated tax during the year triggers an underpayment penalty calculated as an interest charge on the deficiency. Authority Individuals: 26 U.S.C. § 6654 (failure-to-pay-estimated-tax penalty); IRS Form 1040-ES (Estimated Tax for Individuals). Corporations: 26 U.S.C. § 6655 ; IRS Form 1120-W (Estimated Tax for Corporations). Safe harbors: 26 U.S.C. § 6654(d) . Texas does not impose a personal income tax, but Texas franchise tax has its own payment timing rules under Tex. Tax Code § 171.152 . Individual estimated tax Individuals must pay estimated tax if they expect to owe $1,000 or more at year-end after withholding and refundable credits. Quarterly due dates: April 15, June 15, September 15, and January 15 of the following year. Two safe harbors avoid penalty: (1) pay at least 90% of the current year's tax during the year through withholding plus estimated payments; or (2) pay at least 100% of the prior year's tax (110% for taxpayers with prior-year adjusted gross income over $150,000). Withholding from W-2 wages counts toward the safe harbor and is treated as paid evenly throughout the year regardless of when withheld. Corporate estimated tax C-corporations expecting to owe $500 or more at year-end must pay estimated tax in four installments (April 15, June 15, September 15, December 15 for calendar-year filers). Safe harbors include 100% of the current year's tax or 100% of the prior year's tax for corporations with under $1M of taxable income in any of the three preceding years. Large corporations (over $1M taxable income in any of the last three years) generally cannot rely on the prior-year safe harbor, they must base estimates on the current year. Pass-through pitfalls Partners, LLC members, and S-corporation shareholders frequently underpay estimated tax in the year a business has a profitable surge, the entity-level Form 1065 or 1120-S K-1 income is allocated to owners on a pro rata basis regardless of distributions, creating a tax obligation without corresponding cash. The mismatch is the principal reason operating agreements should include a Tax Distribution Provision ensuring quarterly distributions sufficient to cover estimated-tax obligations. Penalty calculation The underpayment penalty under § 6654 and § 6655 is computed as interest at the federal short-term rate plus 3 percentage points, applied to each quarter's underpayment from the original due date until paid (or until the next estimated-tax due date, depending on installment computation). Penalties are typically modest in absolute terms but compound over multiple underpaid quarters and can become material in years of significant income increases. Practical context For Texas business owners, the most common estimated-tax problem is K-1 income hitting at year-end while quarterly payments were made on prior-year levels. Standard remediation: (1) review actual year-to-date entity income each quarter; (2) recalculate estimated tax using the current-year safe harbor before the next due date; (3) ensure operating agreements provide for tax distributions; (4) consider Annualized Income Installment Method for irregular income (Form 2210 Schedule AI for individuals). Related Terms Tax Distribution Provision · Schedule K-1 · Pass-Through Entity · S-Corporation Election · Phantom Income Excess Insurance § Insurance that responds only after primary coverage is exhausted, providing additional limits above the primary layer. Two principal types: (1) following-form excess, adopts the terms of the underlying primary policy with limited modifications; (2) umbrella, broader coverage that may respond to losses not covered by primary policies (filling gaps). Critical for managing liability exposure beyond primary policy limits. Common in commercial programs at $5M, $10M, $25M, and higher attachment points. Excess insurance is insurance that responds only after primary coverage is exhausted, providing additional limits above the primary policy. Excess coverage is critical for managing liability exposure beyond primary policy limits, a single severe claim can easily exceed $1M-$2M primary CGL limits, leaving the insured personally exposed without excess. The two principal types of excess coverage, following-form excess and umbrella, operate differently. Sophisticated commercial programs typically include multiple excess layers stacked on primary policies for managed liability tail risk. Authority Excess and umbrella insurance are specialty market products without a single standard form. Texas case law on excess coverage and primary insurer obligations: Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co. , 236 S.W.3d 765 (Tex. 2007) (no contribution between equal-status primary insurers absent express contractual obligation); Keck, Mahin & Cate v. National Union Fire Ins. Co. , 20 S.W.3d 692 (Tex. 2000) (excess insurer rights against primary). Stowers analog for excess: Am. Centennial Ins. Co. v. Canal Ins. Co. , 843 S.W.2d 480 (Tex. 1992) (excess insurer can pursue Stowers-type claims against primary). Federal coordination: ALI Restatement of the Law of Liability Insurance §§ 33-37 (excess insurer obligations and rights). Following-form excess Following-form excess coverage adopts the terms of the underlying primary policy with limited modifications. The excess policy typically references the primary policy and provides "follow form" coverage subject to (1) the excess limits, (2) the attachment point, and (3) any specific endorsements or exclusions in the excess policy. Following-form excess is the most common excess structure for CGL, the excess insurer provides additional limits above primary CGL, with the same coverage terms and exclusions. Most M&A and large-project liability stacks use following-form excess for predictable, layered coverage. Umbrella coverage Umbrella coverage is broader than following-form excess. Umbrella policies typically: (1) provide excess limits above multiple primary policies (CGL, auto, employer's liability); (2) include "drop-down" coverage where the umbrella responds to losses not covered by primary (filling gaps); (3) have their own coverage terms that may differ from primary; (4) include broader coverage in some areas (e.g., broader personal injury). True umbrella coverage is increasingly rare; most "umbrella" policies are now following-form excess with limited drop-down. Read the policy carefully, the "umbrella" label is sometimes marketing rather than substance. Attachment point structure Excess coverage has an attachment point, the threshold above which the excess responds. Common structures: (1) primary $1M, excess $5M xs $1M , primary covers the first $1M; excess covers $5M above $1M (total $6M); (2) primary $1M, $5M xs $1M, $5M xs $6M , three-layer stack with $11M total; (3) quota share excess , multiple excess insurers share the same layer (e.g., 50/50). Higher attachment points typically have lower premium per dollar of limit. Sophisticated programs stack multiple layers from different carriers to diversify counterparty risk and obtain cost-efficient capacity. The "horizontal" vs. "vertical" exhaustion debate When losses implicate multiple primary policies (e.g., losses spanning multiple policy years), a key question is whether excess attaches after horizontal exhaustion (all primary policies in all years exhausted) or vertical exhaustion (primary in the year of loss exhausted). Texas law generally follows the policy language; most modern excess policies require horizontal exhaustion of primary coverage in the same policy period. Long-tail losses (environmental, construction defect, mass tort) raise complex attachment issues that have been heavily litigated. Following the primary's defense Most excess policies adopt the primary's defense obligations through following-form provisions or specific reference. Some excess policies provide independent defense once primary is exhausted; others "tail in" to existing defense arrangements. Best practice: review excess defense provisions carefully. The "exhaustion" point, when excess defense begins, has substantial cost implications. Sophisticated programs include "drop-down" provisions that allow excess insurers to fund defense before primary exhaustion in appropriate cases. Stowers-type claims in excess Excess insurers can pursue the same Stowers-type claims against primary insurers as the insured. American Centennial Ins. Co. v. Canal Ins. Co. , 843 S.W.2d 480 (Tex. 1992), held that excess insurers have a direct right of action against primary insurers for negligent failure to settle within primary limits, shifting the excess judgment loss to the primary insurer that failed to settle. This creates significant pressure on primary insurers to settle within their limits when reasonable demand is made. Excess insurers actively monitor primary settlement decisions in significant cases. Common provisions and pitfalls Important excess provisions: (1) concurrent coverage requirements , excess often requires specific primary policies in place; failure to maintain primary can void excess; (2) exhaustion language , when primary is "exhausted" can be ambiguous (paid? agreed to pay? settled by judgment?); (3) insolvency of primary , most excess policies do not "drop down" if primary becomes insolvent; (4) defense within or outside limits , affects total available coverage; (5) specific exclusions , excess may exclude items covered by primary. Sophisticated insureds review excess policies for consistency with primary; gaps and inconsistencies create coverage disputes. Practical context For Texas commercial parties, excess and umbrella coverage manages tail risk above primary limits. Best practice: (1) carry excess proportional to liability exposure, minimum $5M for small businesses, $25M+ for mid-market with significant operations; (2) review attachment points and exhaustion language carefully; (3) coordinate excess with primary to avoid coverage gaps; (4) for layered programs, consider counterparty diversification (different excess carriers across layers); (5) for D&O, carry Side A excess for individual director protection; (6) for severe-loss exposures (cyber, environmental, products), evaluate higher limits and specialty policies; (7) review excess provisions on primary insolvency, most excess does not drop down. Common gap: businesses with excess but inadequate primary find that primary erodes quickly during defense, leaving uncovered period before excess attachment. Defense-within-limits primary policies erode faster than expected; either purchase defense-outside-limits primary or carry excess at lower attachment. Related Terms Commercial General Liability Insurance · Stowers Doctrine · Self-Insured Retention · Additional Insured · Directors and Officers Insurance Exempt vs. Non-Exempt Employee § Under FLSA, the classification distinguishing employees entitled to overtime and full wage-and-hour protections (non-exempt) from those excluded from one or more such protections (exempt). Misclassification of non-exempt employees as exempt is the most frequent FLSA violation. Under the Fair Labor Standards Act, employees are classified as either "exempt" or "non-exempt" from minimum wage, overtime, or both. Non-exempt employees are entitled to FLSA's full wage-and-hour protections, including overtime at 1.5x for hours over 40 per week. Exempt employees are excluded from one or more FLSA protections. Authority 29 U.S.C. § 213 (FLSA exemptions); 29 C.F.R. Part 541 (regulations defining the principal exemptions). The principal "white-collar" exemptions (29 C.F.R. Part 541) Each requires both a duties test and a salary test: Executive exemption: primary duty is management of the enterprise or a department; customarily directs the work of two or more full-time employees; has authority to hire/fire (or significant input). Administrative exemption: primary duty is office/non-manual work directly related to management or general business operations; primary duty includes exercise of discretion and independent judgment on significant matters. Professional exemption: primary duty requires advanced knowledge in a field of science or learning, customarily acquired by prolonged specialized intellectual instruction (learned professional), or invention/imagination/originality/talent in a recognized creative field (creative professional). Salary basis test Most exemptions require payment on a "salary basis" of at least $684 per week ($35,568 annually), fixed, predetermined compensation not subject to reduction based on quality or quantity of work. Improper deductions can defeat the exemption. Other exemptions Outside sales (no salary requirement); highly compensated employees (HCE, $107,432 annually with relaxed duties test); computer professionals (specific salary or hourly rate); commissioned retail employees under § 207(i) . Practical context Employer misclassification of non-exempt employees as exempt is the most frequent FLSA violation. Common errors: (1) classifying based on title rather than actual duties; (2) classifying based on salary alone without examining duties; (3) failing the salary-basis test through improper docking of pay for partial-day absences. The Department of Labor periodically revises salary thresholds; the current $684/week was set in 2020. Companion article: Wage and Hour Compliance in Texas Related Terms Fair Labor Standards Act · Texas Payday Law · Independent Contractor Expert Witness Disclosure § The procedural framework for identifying expert witnesses in Texas civil litigation, governed principally by Tex. R. Civ. P. 195. Distinguishes retained or specially employed experts (subject to detailed report requirements) from non-retained experts and consulting experts (whose work is generally protected from discovery). Disclosure deadlines are typically 90 days before trial for the party with the burden, 60 days before trial for the responding party. Expert witness disclosure in Texas civil litigation is governed principally by Rule 195 of the Texas Rules of Civil Procedure, which establishes the procedural framework for identifying and disclosing testifying experts. Rule 195 distinguishes among three categories, retained or specially employed testifying experts, non-retained testifying experts, and consulting experts whose work is generally privileged from discovery, with different disclosure obligations for each. Non-compliance with Rule 195 disclosure deadlines triggers exclusion sanctions under Rule 193.6, often dispositive of the case. Authority Texas expert disclosure framework: Tex. R. Civ. P. 195 (testifying expert disclosure). Discovery framework: Tex. R. Civ. P. 192-193 (general scope; assertion of privilege). Exclusion sanction: Tex. R. Civ. P. 193.6 (failure to disclose). Expert privilege for consulting experts: Tex. R. Civ. P. 192.3(e) (work product protection). Reliability framework applicable to expert testimony: Tex. R. Evid. 702 ; see E.I. du Pont de Nemours & Co. v. Robinson , 923 S.W.2d 549 (Tex. 1995). Rule 195 disclosure categories Retained or specially employed testifying experts : experts retained for the litigation (or whose duties as employees of the party regularly involve giving expert testimony) must produce: (1) the expert's name, address, and CV; (2) all documents the expert has been given relating to the subject matter; (3) the expert's mental impressions, opinions, and the underlying factual basis; (4) the rate and amount of compensation. The expert is subject to deposition by the opposing party. Non-retained testifying experts : testifying experts not retained for the litigation (e.g., treating physicians, fact witnesses with expertise) face lesser disclosure requirements but must still be timely identified. Consulting experts : experts retained for trial preparation but not designated as testifying are generally privileged from discovery under work-product protection, only their identity and impressions reviewed by the testifying expert are typically discoverable. Disclosure deadlines Rule 195's default deadlines depend on the burden of proof: (1) party with burden , disclosure 90 days before trial; (2) responding party , disclosure 60 days before trial. Parties may agree to alternative schedules; trial courts may modify by scheduling order. The standard pattern in commercial cases is a docket-control order extending the windows substantially, disclosure 4-6 months before trial is typical for complex commercial cases. The deadline runs from the actual trial date; continuances can reset deadlines but only by court order. The exclusion sanction Rule 193.6 imposes an automatic exclusion sanction for failure to timely disclose: a party who fails to comply with Rule 195 may not introduce the undisclosed expert's testimony unless the court finds (a) good cause for the failure or (b) lack of prejudice. The Texas Supreme Court has applied Rule 193.6 strictly, exclusion is the rule, not the exception. Late disclosure typically requires showing not only that the late evidence is important, but also that the party diligent ly attempted to comply and that any prejudice can be mitigated. Expert depositions Once disclosed, retained testifying experts are subject to deposition. Texas practice typically allows the opposing party 30 days from disclosure to take the deposition, scheduled before the deadline for the responding party's own disclosures. Deposition discovery probes: (1) qualifications and CV; (2) materials reviewed; (3) opinions and the basis for each; (4) methodologies and reasoning; (5) work performed for prior clients; (6) compensation. The deposition is the principal vehicle for developing reliability challenges and for identifying weaknesses to exploit at trial. Practical drafting, the expert report Expert reports in Texas commercial litigation typically include: (1) introduction , engagement scope, qualifications, methodology; (2) facts and assumptions , what the expert was asked to assume or accept; (3) analysis , application of methodology to facts; (4) opinions , clear statements of conclusions with supporting reasoning; (5) damages or other quantitative analysis , calculations with all assumptions disclosed; (6) materials reviewed , comprehensive list; (7) compensation and prior testimony , fee structure, rate, prior cases. The report should be detailed enough to survive a Daubert challenge and support the expert's deposition and trial testimony without significant amendments. Practical context For Texas commercial litigants, expert disclosure compliance is mission-critical. The exclusion remedy under Rule 193.6 has dispositive consequences in cases where expert testimony is essential, failed designation can effectively end a case before trial. Best practice: (1) calendar disclosure deadlines from inception of the case; (2) engage experts well before disclosure deadlines to allow report preparation and review; (3) confirm the docket-control order's expert deadlines and seek modification early if needed; (4) prepare retained-expert reports to satisfy not only Rule 195 but also Daubert/Robinson reliability requirements; (5) plan deposition strategy for opposing experts. The cost of late expert engagement is rarely just delayed schedule, it often means losing the case. Related Terms Daubert and Robinson Standards · Summary Judgment · Motion in Limine · Sanctions · Deposition F FAA Preemption § 2024 The doctrine that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) preempts state laws that single out arbitration agreements for unfavorable treatment or burden their enforcement. The FAA applies to arbitration agreements involving interstate commerce; the Texas General Arbitration Act (TGAA) applies to intrastate arbitration agreements. The Supreme Court reaffirmed the broad preemptive scope of the FAA in cases including AT&T Mobility v. Concepcion (2011) and most recently Smith v. Spizzirri (2024) on the mandatory-stay rule. FAA preemption is the doctrine that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) preempts state laws that single out arbitration agreements for unfavorable treatment or burden their enforcement. The FAA establishes a federal policy favoring arbitration, applies to all arbitration agreements involving interstate commerce, and preempts inconsistent state law. The doctrine has been actively developed by the U.S. Supreme Court, most recently in Smith v. Spizzirri , 601 U.S. 472 (2024), which held that § 3 of the FAA mandates a stay (rather than dismissal) of court proceedings pending arbitration. Authority Federal Arbitration Act: 9 U.S.C. § 1 et seq.: § 2 (validity of arbitration agreements); § 3 (stay of proceedings); § 4 (compel arbitration). Texas General Arbitration Act: Tex. Civ. Prac. & Rem. Code Ch. 171 . Foundational FAA preemption cases: Southland Corp. v. Keating , 465 U.S. 1 (1984); Allied-Bruce Terminix Cos. v. Dobson , 513 U.S. 265 (1995). Modern doctrine: AT&T Mobility LLC v. Concepcion , 563 U.S. 333 (2011) (preempting state-law class-action prohibitions in arbitration); Kindred Nursing Centers Ltd. P'ship v. Clark , 581 U.S. 246 (2017) (preempting state-law clear-statement rules); Smith v. Spizzirri , 601 U.S. 472 (2024) (mandatory stay under § 3). Section 2, the validity rule Section 2 of the FAA is the heart of the statute: it makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The "save upon such grounds" clause permits state-law contract defenses (fraud, duress, unconscionability) but only when applied generally, not specifically targeting arbitration. State laws that disfavor arbitration agreements are preempted; state laws applying generally to all contracts are preserved. Section 3, mandatory stay (post-Spizzirri) Smith v. Spizzirri , 601 U.S. 472 (2024), resolved a long-standing circuit split on the application of FAA § 3. The Supreme Court held that § 3 mandates a stay of court proceedings pending arbitration, not dismissal, even when all claims are subject to arbitration. The decision rejects the "discretionary dismissal" view that some circuits had adopted (allowing courts to dismiss rather than stay). Practical impact: courts must retain jurisdiction over the underlying case during arbitration, providing a docket for post-arbitration confirmation, vacatur, or other relief. The case applies federally and was binding on Texas state courts through FAA preemption. FAA vs. TGAA, interaction with Texas law The Texas General Arbitration Act (Chapter 171 of the CPRC) provides a state-law parallel framework for arbitration agreements not involving interstate commerce. Most commercial arbitration in Texas falls under the FAA because of the broad interpretation of "involving commerce", including local transactions with even modest interstate connections. Where both apply, the FAA preempts inconsistent TGAA provisions; where the FAA does not apply (purely intrastate, certain specific exclusions like seamen and railroad employees), the TGAA governs. Most arbitration agreements in commercial contracts specify FAA governance to leverage the more pro-arbitration federal framework. What FAA preemption forbids The Supreme Court has invalidated several types of state laws as FAA-preempted: (1) Concepcion , state-law rules prohibiting class-action waivers in consumer contracts; (2) Kindred Nursing , state-law clear-statement rules requiring specific reference to arbitration in powers of attorney; (3) Doctor's Associates v. Casarotto , 517 U.S. 681 (1996), Montana statute requiring conspicuous notice of arbitration on contract face; (4) Marmet Health Care Center v. Brown , 565 U.S. 530 (2012), categorical state-law refusal to enforce arbitration in personal-injury cases. The pattern: state laws that target arbitration specifically (rather than applying generally to all contracts) are preempted. What FAA preemption permits The FAA preserves general state-law contract defenses applied evenhandedly: (1) fraud in the inducement of the arbitration clause specifically (separate from fraud in the underlying contract, under Prima Paint v. Flood & Conklin , 388 U.S. 395 (1967), only fraud directed at the arbitration clause itself defeats arbitration); (2) unconscionability applied generally, though unconscionability findings that systematically disadvantage arbitration may themselves be preempted; (3) duress, undue influence, lack of capacity ; (4) statute of frauds applied generally; (5) illegality in the underlying transaction. Texas courts apply these defenses but must do so without arbitration-specific bias. Federal court enforcement Federal courts have concurrent jurisdiction with state courts to enforce FAA arbitration agreements. Section 4 of the FAA authorizes a party to bring a separate action in federal court to compel arbitration. Section 9 governs confirmation of arbitration awards; § 10 governs vacatur on enumerated grounds (corruption, fraud, partiality, exceeding authority, manifest disregard, the last of which the Supreme Court has cast doubt on as a separate ground). Texas state courts apply the same standards as federal courts under the FAA. Practical context For Texas commercial parties, FAA preemption analysis is essential whenever arbitration enforcement is contested. Best practice: (1) draft arbitration clauses to specify FAA governance and broad-form scope; (2) confirm interstate-commerce nexus to invoke FAA; (3) raise FAA preemption defensively when challenged on state-law grounds; (4) post-Spizzirri, request stay rather than dismissal; (5) preserve unconscionability and other generally-applicable defenses while distinguishing them from arbitration-specific challenges. The FAA's pro-arbitration policy continues to expand; recent Supreme Court decisions almost uniformly favor arbitration enforcement against state-law obstacles. Parties wanting to avoid arbitration must structure contract negotiation to exclude arbitration provisions at inception, since after-the-fact challenges face an uphill battle. Related Terms Arbitration · Texas Arbitration Act · Choice of Law · Mandamus · Interlocutory Appeal Factoring § A financing arrangement in which a business sells its accounts receivable to a third party (the factor) at a discount in exchange for immediate cash. Distinct from a loan secured by receivables, the factor purchases ownership of the receivables. Under Texas UCC Article 9, sale of accounts is treated as a secured transaction for filing purposes. May be recourse (seller bears collection risk) or non-recourse (factor bears collection risk). Factoring is a financing arrangement in which a business (the seller, often called the "client") sells its accounts receivable to a third party (the "factor") at a discount in exchange for immediate cash. Factoring is distinct from a traditional loan secured by receivables: the factor purchases ownership of the accounts, not merely a security interest. Despite the technical sale characterization, Texas UCC Article 9 treats the sale of accounts as a secured transaction for purposes of filing, perfection, and priority, collapsing many of the distinctions that exist in other commercial contexts. Authority Texas UCC Article 9 application to factoring: Tex. Bus. & Com. Code § 9.109(a)(3) (Article 9 applies to a sale of accounts); § 9.102(a)(2) (definition of "account"); § 9.318 (no interest retained in right to payment that is sold); § 9.406 (notification to account debtors of assignment). Anti-assignment override: § 9.406(d) (anti-assignment clauses ineffective against assignment of accounts). General Texas usury exemption for purchases vs. loans: Holley v. Watts , 629 S.W.2d 694 (Tex. 1982) (true sale not subject to usury limits). Sale-versus-loan characterization The threshold legal question in any factoring transaction is whether the arrangement constitutes a true sale of receivables or a loan secured by receivables. The distinction matters for (1) usury , a true sale is generally outside Texas usury limits, while a loan dressed as a sale may be subject to the 18% ceiling; (2) bankruptcy , true-sale receivables are not property of the seller's bankruptcy estate, while loan-collateral receivables are; (3) balance sheet , true sales are off-balance-sheet, loans appear as debt. Factors that support true-sale characterization: (a) factor's obligation to remit collections is absolute, not contingent on creditworthiness; (b) factor's recourse rights are limited; (c) seller's recourse exposure is bounded; (d) the transaction documents consistently use sale terminology. Factors against true-sale: (a) full recourse to seller for non-collection; (b) seller's right to "buy back" the receivables; (c) factor's right to a fixed rate of return regardless of collection performance. Recourse vs. non-recourse factoring Recourse factoring : the seller remains liable to the factor if an account debtor fails to pay. The factor's risk is essentially limited to collection mechanics; the seller bears the underlying credit risk. Recourse factoring is generally cheaper but provides less risk transfer. Non-recourse factoring : the factor bears the credit risk on approved accounts. Non-recourse factoring is more expensive but transfers credit risk on disputed creditworthiness. Most commercial factoring arrangements are partial recourse, recourse for disputes, returns, and short-pays, but non-recourse for pure credit losses. Notification and verification Under § 9.406, the factor's rights are perfected through filing a UCC-1 financing statement (treating the factoring transaction as a secured transaction for filing purposes) AND, in most arrangements, by notification to the account debtors of the assignment. Notification directs account debtors to pay the factor directly rather than the seller. Account debtors who pay the seller after receiving valid notification are not discharged; account debtors who pay the seller before receiving notification are discharged. Section 9.406(d) makes anti-assignment clauses in the underlying contract ineffective, account debtors cannot prevent factoring through contractual restrictions. Verification and dilution Most factoring agreements include verification provisions, the factor's right to confirm with account debtors that the goods or services have been delivered, the invoice is correct, and no offsets are claimed. "Dilution" refers to reductions in collectible amount through returns, allowances, disputes, short-pays, or offsets. Most factoring agreements adjust the advance rate based on dilution history; high-dilution sellers receive lower advance rates or pay higher fees. Disputed invoices ("disputed receivables") are typically chargeable back to the seller regardless of recourse vs. non-recourse posture. Texas-specific considerations Texas factoring transactions benefit from a clear statutory framework under UCC Article 9 and a long line of case law confirming that true-sale factoring is outside usury constraints. Two practical considerations: (1) oilfield-services factoring , large industry segment in Texas with specialized factors and unique receivable characteristics; (2) healthcare factoring , subject to additional federal and state regulatory overlays (Medicare/Medicaid receivables, anti-assignment rules in some payor contexts). Both require specialized counsel beyond general factoring practice. Practical context For Texas SMBs, factoring is most attractive when (1) the business is too young or too leveraged to qualify for traditional bank financing; (2) the business has working-capital intensive growth and slow-paying customers; (3) the business is willing to trade margin (factoring discount) for cash-flow predictability and growth capital. The principal trade-off: factoring is more expensive than bank lines (typically 1.5%-3% per 30 days vs. prime+1-3% annualized for bank lines) but easier to obtain and scales with sales. Factoring agreements should be carefully reviewed for true-sale characterization, recourse scope, dilution definitions, advance rates, and termination/exit provisions. Related Terms Security Interest · Collateral · Financing Statement · Perfection · Usury Fair Labor Standards Act § The federal wage-and-hour statute establishing minimum wage, overtime pay, recordkeeping, and child labor standards for covered employees. Operates alongside the Texas Payday Law, FLSA governs the amount of wages owed; the Payday Law governs the timing. The Fair Labor Standards Act (FLSA) is the federal wage-and-hour statute establishing minimum wage, overtime pay, recordkeeping, and child labor standards for covered employees. FLSA applies to most Texas employers and operates alongside the Texas Payday Law, FLSA governs the amount of wages owed; the Payday Law governs the timing . Authority 29 U.S.C. §§ 201–219 (FLSA); 29 C.F.R. Parts 510–579 (DOL regulations). Federal minimum wage: 29 U.S.C. § 206 . Overtime: 29 U.S.C. § 207 . Exemptions: 29 U.S.C. § 213 . Recordkeeping: 29 U.S.C. § 211(c) . Coverage FLSA covers employees of "enterprises" with annual gross volume of $500,000 or more, plus employees individually engaged in interstate commerce or producing goods for commerce. § 203(s) . Most Texas businesses are FLSA-covered through one or both bases; coverage analysis is rarely a meaningful obstacle. Minimum wage Federal minimum wage is $7.25 per hour. § 206 . Texas adopts the federal minimum wage; there is no separate Texas minimum wage above federal. Tex. Lab. Code § 62.051 . Overtime Non-exempt employees must receive overtime compensation at one-and-one-half times their regular rate of pay for hours worked over 40 in a workweek. § 207(a) . The "regular rate" includes most non-discretionary compensation, not just base hourly rate. Exemptions Specified categories of employees are exempt from minimum wage, overtime, or both. § 213 . See Exempt vs. Non-Exempt Employee for the principal exemptions. Remedies Backpay for unpaid wages; liquidated damages equal to the backpay (effectively doubling) unless the employer proves good-faith reasonable belief; attorney's fees and costs. § 216 . Statute of limitations: 2 years for ordinary violations, 3 years for willful violations. § 255 . Enforcement U.S. Department of Labor Wage and Hour Division investigates and litigates FLSA claims. Employees may also file private civil actions in federal or state court. § 216(b) . Practical context FLSA misclassification of non-exempt employees as exempt is the single most common federal employment-law violation. Texas businesses commonly run afoul of: (1) the salary basis test for executive, administrative, and professional exemptions; (2) overtime calculation including bonuses and commissions in the regular rate; (3) recordkeeping of hours worked by non-exempt employees. Coordination with the Texas Payday Law is critical, most disputes invoke both statutes. Companion article: Wage and Hour Compliance in Texas Related Terms Exempt vs. Non-Exempt Employee · Texas Payday Law · Independent Contractor · Wage Claim Family and Medical Leave Act (FMLA) § Federal statute (29 U.S.C. § 2601 et seq.) requiring covered employers to provide eligible employees up to 12 workweeks of unpaid, job-protected leave per 12-month period for specified family and medical reasons. Coverage: employers with 50+ employees within 75 miles. Eligibility: 12 months service, 1,250 hours worked. Job restoration and benefits continuation required. Up to 26 weeks for military caregiver leave. The Family and Medical Leave Act (FMLA) requires covered employers to provide eligible employees up to 12 workweeks of unpaid, job-protected leave per 12-month period for specified family and medical reasons. Enacted in 1993, the FMLA addresses workplace tensions around childbirth, family caregiving, and serious illness by guaranteeing leave without termination. Coverage is significant but not universal, employers must have 50+ employees within 75 miles of the worksite, and employees must satisfy length-of-service and hours-worked thresholds. The FMLA coordinates with the ADA, workers' compensation, and various state and local leave laws (Texas has no state FMLA equivalent). Authority Federal statute: 29 U.S.C. §§ 2601-2654 . DOL regulations: 29 C.F.R. Part 825 . Coverage: employers with 50+ employees within 75 miles of worksite. Employee eligibility: 12 months service (need not be consecutive); 1,250 hours worked in prior 12 months. Foundational cases: Ragsdale v. Wolverine World Wide , 535 U.S. 81 (2002) (substantive vs. procedural FMLA rights); Coleman v. Court of Appeals of Maryland , 566 U.S. 30 (2012) (state sovereign immunity). Damages: 29 U.S.C. § 2617 (back pay, liquidated damages for willful violations, fees). Qualifying reasons for FMLA leave FMLA permits up to 12 workweeks of leave for: (1) birth and bonding with newborn child (within 12 months of birth); (2) placement for adoption or foster care and bonding (within 12 months); (3) serious health condition of family member , spouse, child, or parent (not in-laws, siblings, grandparents); (4) employee's own serious health condition rendering employee unable to perform essential functions; (5) qualifying military exigency arising from family member's covered active duty. Up to 26 workweeks (single 12-month period) are available for: (6) military caregiver leave , care for covered servicemember with serious injury or illness incurred in line of duty. "Serious health condition" defined "Serious health condition" includes: (1) inpatient care , overnight hospitalization; (2) incapacity plus continuing treatment , typically 3+ days incapacity with treatment by healthcare provider; (3) chronic conditions , long-term conditions requiring periodic visits and treatment; (4) permanent or long-term conditions ; (5) multiple treatments , for restorative surgery or conditions requiring multiple treatments. The definition encompasses most serious medical conditions but excludes routine illnesses (cold, flu, minor procedures with no complications). Job restoration and benefits FMLA provides specific protections: (1) job restoration , return to same or "equivalent" position; equivalent means similar pay, benefits, working conditions, terms; (2) benefits continuation , group health coverage continues during leave on same terms (employee pays normal employee share); (3) no retaliation , adverse action for FMLA leave use is prohibited; (4) no interference with FMLA rights. Key employees (top 10% earners) may be denied restoration in narrow circumstances. Intermittent and reduced-schedule leave FMLA leave can be taken intermittently or on reduced schedule when medically necessary: (1) medical treatment , periodic appointments, chemotherapy, dialysis; (2) chronic condition , flare-ups; (3) pregnancy-related conditions ; (4) family care , covering serious health condition of family member with periodic care needs. Tracking intermittent leave use against the 12-week annual entitlement is operationally complex. Notice and certification FMLA notice requirements: (1) employee notice to employer , 30 days advance notice when foreseeable; "as soon as practicable" otherwise; (2) employer notice of FMLA designation , within 5 business days after sufficient information; (3) medical certification , employer can require certification from healthcare provider supporting need for leave; second/third opinions available at employer expense; (4) recertification , every 30 days for ongoing conditions; (5) fitness-for-duty certification , required for return from own-serious-health-condition leave if employer policy so requires. Failure to designate FMLA leave promptly can result in leave time not counting against the 12-week entitlement. Coordination with other leaves FMLA coordinates with other leave statutes: (1) ADA , leave can be reasonable accommodation; substantial overlap with FMLA serious-health-condition leave; ADA may provide longer leaves than FMLA; (2) workers' compensation , work-related injury creating serious health condition can run concurrent FMLA leave; (3) employer-paid leave , paid leave typically can run concurrently with FMLA at employer or employee election; (4) military leave (USERRA), separate but coordinated. Sophisticated leave administration coordinates all applicable leave types. Damages and remedies FMLA enforcement (29 U.S.C. § 2617) provides: (1) back pay and benefits ; (2) liquidated (double) damages for willful violations; (3) front pay or reinstatement ; (4) injunctive relief ; (5) attorney's fees and costs . FMLA does not provide compensatory damages for emotional distress or punitive damages, distinguishing it from Title VII and ADA but matching ADEA's structure. Practical context For Texas employers with 50+ employees, FMLA compliance is operational. Best practice: (1) maintain comprehensive FMLA policy in handbook; (2) train HR and managers on FMLA designation triggers; (3) provide DOL Notice of Eligibility and Rights and Responsibilities promptly; (4) require medical certification on standard DOL forms; (5) track intermittent leave carefully; (6) coordinate FMLA with ADA, workers' compensation, paid leave; (7) prevent retaliation. For employees: (1) provide adequate advance notice; (2) submit medical certification promptly; (3) preserve documentation; (4) understand 12-week annual cap and military caregiver 26-week extension; (5) recognize concurrent ADA rights for chronic conditions. Common pitfall: employers failing to designate FMLA leave promptly, leave time may not count against 12-week entitlement, extending the protected period. Companion article: Before Firing an Employee Related Terms Americans with Disabilities Act · Workers' Compensation · COBRA · Wrongful Termination · Workplace Discrimination Fiduciary Duty § 2025 The obligation of one party (the fiduciary) to act in the best interests of another (the beneficiary) when entrusted with property, authority, or confidence. In Texas business law, fiduciary duties are owed by corporate officers and directors, by general partners, and (subject to the company agreement) by LLC members and managers. A fiduciary duty is the obligation of one party (the fiduciary) to act in the best interests of another (the beneficiary) when entrusted with property, authority, or confidence. In Texas business law, fiduciary duties are owed by corporate officers and directors to the corporation; by general partners to the partnership and to other partners; and, depending on the company agreement, by LLC members and managers to the LLC and to other members. Authority In Texas, corporate fiduciary duties were not codified until 2025; before then they were creatures of common law developed through Texas Supreme Court decisions and the Fifth Circuit's interpretation of Texas law. The leading modern common-law formulation comes from Ritchie v. Rupe , 443 S.W.3d 856, 868 (Tex. 2014), which traces back to International Bankers Life Insurance Co. v. Holloway , 368 S.W.2d 567 (Tex. 1963), and Cates v. Sparkman , 11 S.W. 846 (Tex. 1889). Effective May 14, 2025, Senate Bill 29 added Tex. Bus. Orgs. Code § 21.419 , which codifies the business judgment rule for Texas for-profit corporations with shares listed on a national securities exchange and any Texas for-profit corporation that affirmatively opts in. For LLCs and limited partnerships, fiduciary duties remain primarily a creature of contract under Tex. Bus. Orgs. Code § 101.401 (LLCs) and § 152.002(e) (limited partnerships). The three components Texas recognizes three traditional components of a director's fiduciary duty: Duty of obedience. The duty to act within the scope of authority granted by the certificate of formation, governing documents, and applicable law, a director may not authorize ultra vires acts. Duty of care. The duty to perform with the care that an ordinarily prudent person would exercise in similar circumstances. Gearhart Indus., Inc. v. Smith Int'l, Inc. , 741 F.2d 707 (5th Cir. 1984) (applying Texas law). Duty of loyalty. As reformulated in Ritchie v. Rupe and reaffirmed in Sneed v. Webre , 465 S.W.3d 169 (Tex. 2015): "the dedication of [the director's] uncorrupted business judgment for the sole benefit of the corporation." Informal fiduciary duty Texas also recognizes that a fiduciary duty may arise informally from a "moral, social, domestic, or purely personal relationship of trust and confidence" that exists prior to and independent of the parties' business relationship. Ritchie v. Rupe , 443 S.W.3d at 874. Courts apply this doctrine narrowly. Contractual modification (LLCs and limited partnerships) For LLCs, Tex. Bus. Orgs. Code § 101.401 permits the company agreement to expand, restrict, or, effective May 14, 2025, eliminate any duties (including fiduciary duties) and related liabilities owed by members, managers, officers, or other persons to the company or to one another. For Texas limited partnerships, § 152.002(e) (added by SB 29 effective May 14, 2025) provides comparable elimination authority through the partnership agreement. Practical context Most Texas business disputes that reach a courtroom turn on fiduciary duty in some form. After Ritchie v. Rupe , minority-shareholder claims against directors and controlling shareholders are typically asserted as derivative claims for breach of fiduciary duty rather than as direct oppression claims. The legal landscape for these claims diverged substantially in 2025: publicly-traded Texas corporations and Texas corporations that opt into § 21.419 are now governed by the codified business judgment rule with heightened pleading requirements and statutory presumptions, while closely-held Texas corporations under § 21.563 , Texas LLCs, and Texas limited partnerships continue to operate under the pre-2025 common-law framework supplemented by contractual modification. Related Terms Business Judgment Rule · Director · Derivative Action · Corporation · Limited Liability Company · Shareholder Oppression Final Paycheck § Wages owed to an employee at the conclusion of employment, including earned wages, overtime, accrued vacation pay (if owed by company policy), commissions, and bonuses. Texas law specifies firm timing requirements: 6 days for involuntary termination, next regular payday for voluntary resignation. The "final paycheck" is the wages owed to an employee at the conclusion of employment, including all earned but unpaid regular wages, overtime, accrued vacation pay (if owed by company policy), commissions, and bonuses. Texas law specifies firm timing requirements for delivery of the final paycheck. Authority Tex. Lab. Code § 61.014 (final pay timing); § 61.001(7) (definition of "wages"); § 61.0031 (treble damages for willful nonpayment). Timing requirements Involuntary termination (employer-initiated, with or without cause): the employer must deliver final wages within six calendar days of termination. § 61.014(a) . The six-day rule applies to layoffs, dismissals, mutual-agreement separations where the employer initiated the discussion, and most other employer-initiated departures. Voluntary resignation (employee-initiated): the employer must deliver final wages by the next regularly scheduled payday following the resignation date. § 61.014(b) . This may mean waiting up to one full pay cycle. What must be included Earned regular wages and overtime through the date of separation; commissions due under company policy; bonuses earned and payable; accrued vacation pay if the employer's policy requires payout (Texas does not require vacation payout absent policy obligation). Permissible deductions Same rules as any other wage payment under § 61.018 , only legally-required, court-ordered, or written-employee-authorized deductions. Employers cannot deduct for property damage, unreturned equipment, or alleged debts without specific written authorization. Practical context Final paycheck disputes are among the most common Texas Payday Law claims. Employer failures typically arise from (1) waiting for the next payroll cycle on involuntary terminations (six-day rule applies, not next payday); (2) deducting for unreturned equipment without proper authorization; (3) failing to pay accrued commissions or bonuses; (4) miscalculating accrued vacation under the employer's own policy. Companion article: Before Firing an Employee in Texas Related Terms Texas Payday Law · Wage Claim · Severance Agreement · At-Will Employment Financing Statement (UCC-1) § 2025 The public record filed by a secured party to give notice of a security interest in the debtor's personal property. Perfects the security interest against third parties and establishes priority date. Texas SOS no longer accepts paper filings as of August 29, 2025. A financing statement (commonly called a "UCC-1" after the standard form number) is the public record filed by a secured party to give notice of a security interest in the debtor's personal property. The financing statement perfects the security interest against third parties, establishing the secured party's priority date for collateral disputes. Authority Tex. Bus. & Com. Code §§ 9.501–9.527 : § 9.502 (contents); § 9.503 (debtor name); § 9.504 (collateral description); § 9.515 (five-year duration; continuation); § 9.516 (filing methods); § 9.519 (records); § 9.527 (biennial legislative report). Required contents Under § 9.502 , a financing statement is sufficient if it provides: (1) the name of the debtor; (2) the name of the secured party (or representative); and (3) an indication of the collateral covered by the financing statement. The collateral description may be specific or by category, including a "supergeneric" description such as "all assets" of the debtor. Debtor name requirements (§ 9.503) The most common cause of filing failure. For an individual: the name on the debtor's unexpired Texas driver's license, or a similar government-issued ID. For a registered organization: the exact name on the public organic record (certificate of formation). Trade names, abbreviations, and misspellings can render the financing statement seriously misleading and ineffective against third parties. Filing location For most Texas debtors, the Texas Secretary of State. Effective August 29, 2025, the Texas SOS no longer accepts paper UCC filings, all filings must be submitted through the SOS online system. Duration and continuation (§ 9.515) A financing statement is effective for five years from filing. The secured party may continue effectiveness for additional five-year periods by filing a continuation statement within six months before lapse. Failure to file a continuation results in automatic lapse, leaving the security interest unperfected and subordinate to intervening secured creditors. Practical context UCC-1 filings are the foundation of secured commercial lending. Filing errors, wrong debtor name, missing continuation, ambiguous collateral description, can convert a secured creditor into an unsecured creditor in bankruptcy. The August 2025 paper-filing sunset eliminated a procedural option that some practitioners had relied on; all filings now go through the SOS online system. Related Terms Security Interest · Perfection · Collateral Force Majeure § A contractual provision excusing one or both parties from performance when extraordinary events outside the parties' control prevent performance. Force majeure is a creature of contract, Texas does not recognize a general common-law force majeure doctrine. A force majeure clause is a contractual provision excusing one or both parties from performance when extraordinary events outside the parties' control prevent performance. Force majeure is a creature of contract, Texas does not recognize a general common-law force majeure doctrine excusing performance for unanticipated events. Authority Force majeure is a creature of contract. Coordination with UCC impracticability doctrine: Tex. Bus. & Com. Code §§ 2.613 (casualty to identified goods), 2.615 (excuse by failure of presupposed conditions), 2.616 (procedure on notice claiming excuse). Common-law impossibility and frustration-of-purpose doctrines apply narrowly to non-UCC contracts. Typical structure A force majeure clause specifies (1) the events that trigger force majeure (specifically enumerated and/or by general language); (2) the obligations excused (typically performance, not payment); (3) notice requirements; (4) duration of excuse; and (5) termination rights if the force majeure persists beyond a specified period. Common enumerated events Acts of God (hurricanes, floods, earthquakes); war and civil unrest; terrorism; government action; labor strikes; pandemic and epidemic; failure of utilities; transportation disruptions. The COVID-19 pandemic generated extensive force-majeure litigation; Texas courts generally enforced clear contract language and rejected expansive readings of generic "Act of God" or "circumstances beyond our control" provisions. Texas interpretation Texas courts construe force majeure clauses according to their plain language, events not within the express terms are not excused. Generic language is read narrowly. The clause must be triggered by an event that prevents performance, not merely makes performance more difficult or expensive. Practical context Post-COVID, sophisticated commercial drafting includes specific pandemic and government-shutdown enumerations rather than relying on generic "Act of God" language. Notice and mitigation obligations are commonly negotiated to balance the parties' risk allocation. Companion article: Contract Disputes in Texas Related Terms Sale of Goods · Material Adverse Change · Statute of Frauds Foreign Entity § Any entity formed under the laws of a jurisdiction other than Texas. A foreign entity must register with the Texas Secretary of State before "transacting business" in Texas. A "foreign entity" under Texas law is any entity (corporation, LLC, limited partnership, business trust, or similar entity) formed under the laws of a jurisdiction other than Texas. A foreign entity must register with the Texas Secretary of State before "transacting business" in Texas. Authority Tex. Bus. Orgs. Code Chapter 9: § 9.001 (registration requirement); § 9.004 (application contents); §§ 9.051–9.054 (penalties for failure to register); § 9.251 (activities not constituting "transacting business"); § 1.002(28)–(29) (foreign-entity definitions). Internal affairs governed by formation jurisdiction's law: § 1.105 . Registration requirement Under § 9.001 , a foreign filing entity must register if it transacts business in Texas. The registration fee is $750 for most for-profit entities and $25 for nonprofit corporations. "Transacting business" Texas does not define the term. Under § 9.251 , sixteen activities are excluded, among them, maintaining bank accounts, holding internal-affairs meetings, owning passive real estate, isolated transactions completed within 30 days, and selling through independent contractors. The general principle: regular and continuous Texas business activity (offices, employees, regular contracting) requires registration; isolated or passive activity does not. Penalties for failure to register Under §§ 9.051–9.054 , a foreign entity that fails to register: (1) cannot maintain an action, suit, or proceeding in any Texas court until registered; (2) is subject to a civil penalty equal to all fees and taxes that would have been imposed; (3) may be enjoined from transacting business by the Texas Attorney General; and (4) is subject to a late-filing fee equal to the registration fee for each year (or portion) of unregistered transacting. The validity of contracts and other acts is unaffected by failure to register. Internal affairs A foreign entity's internal affairs (governance, fiduciary duties, owner rights) are governed by the law of its jurisdiction of formation, not Texas law. § 1.105 . Practical context The "transacting business" threshold is intentionally fact-intensive. Many out-of-state businesses operate in Texas without registering and without consequence, but litigation triggers the registration question, and the inability to maintain a Texas suit is a meaningful penalty for plaintiffs. Pro-active registration is the safer path for any meaningful Texas operation. Related Terms Corporation · Limited Liability Company · Registered Agent · Certificate of Formation Form 1099-NEC § The IRS information return used to report nonemployee compensation of $600 or more paid to independent contractors during a calendar year. Required from any business making qualifying payments to a non-corporate service provider. Due January 31 for both copy to recipient and copy to the IRS. Backup withholding obligations apply when the payee fails to provide a valid Taxpayer Identification Number. Form 1099-NEC (Nonemployee Compensation) is the IRS information return used to report payments of $600 or more made to independent contractors and other non-employee service providers during a calendar year. The form was reintroduced in 2020 (it had been part of Form 1099-MISC from 1983 through 2019); nonemployee compensation now has its own dedicated form and earlier filing deadline. Filing 1099-NECs is the principal annual compliance burden imposed on businesses that engage independent contractors. Authority Reporting requirement: 26 U.S.C. § 6041A (returns regarding nonemployee compensation). Backup withholding: 26 U.S.C. § 3406 . Failure-to-file penalties: 26 U.S.C. § 6721 (failure to file correct information return); § 6722 (failure to furnish correct payee statement). Form W-9 (Request for Taxpayer Identification Number and Certification) used to collect contractor information. Who must file A 1099-NEC is required from any person engaged in a trade or business who pays $600 or more during the calendar year for services performed by a non-employee. Required for payments to: (1) sole proprietors and single-member LLCs; (2) partnerships and multi-member LLCs taxed as partnerships; (3) attorneys (regardless of corporate form, payments to lawyers always require a 1099); (4) certain other categories. Payments to corporations are generally NOT subject to 1099-NEC reporting, with the attorney-fee exception. Payments under $600 are not required to be reported but should be tracked for the payee's tax records. Filing deadlines Form 1099-NEC has a single deadline of January 31 for both the recipient copy and the IRS filing, earlier than other 1099 forms. Electronic filing is required for filers submitting 10 or more information returns in aggregate (the 10-return threshold became effective for 2024 returns, replacing the prior 250-return threshold). Late or missed filings trigger penalties under § 6721 and § 6722, with amounts varying based on lateness ($60 to $310+ per form for tax year 2024-2026, with intentional disregard penalties higher). Backup withholding If a contractor fails to provide a Taxpayer Identification Number on Form W-9, the payer must withhold federal income tax at 24% from payments (backup withholding under § 3406) and remit it to the IRS using Form 945. Best practice: collect a completed W-9 BEFORE making the first payment to any contractor, once payments have been made without backup withholding, fixing the issue retroactively is administratively painful. Worker classification Issuing a 1099-NEC presumes the worker is an independent contractor rather than an employee. Misclassification, treating an employee as a contractor to avoid payroll taxes and benefits, is a significant audit and litigation risk under both IRS rules (20-factor common-law test) and Texas Workforce Commission classification standards. The 1099 is not, by itself, a defense to misclassification; it is documentation supporting (or refuting) the parties' good-faith treatment of the relationship. Practical context For Texas businesses, the 1099-NEC compliance posture should include: (1) W-9 collected before first payment; (2) contractor-vs-employee analysis documented at the outset; (3) annual 1099-NEC issuance via payroll provider or accounting software; (4) electronic filing required if aggregating 10+ returns; (5) documented procedures for vendors who change tax status mid-year. The administrative burden is modest at small scale but grows quickly, most businesses with 30+ contractors should automate this through payroll or accounting platforms. Companion article: Before You Fire That Employee, Texas Pre-Termination Checklist Related Terms Independent Contractor · Schedule K-1 · Employer Identification Number · Fair Labor Standards Act Form D § An SEC notice filing required under Regulation D. Issuers must file Form D within 15 days of the first sale of securities in a Reg D offering. Form D provides basic information about the offering: issuer, exemption claimed, amount sold, types of investors, related persons. Filed electronically through EDGAR. Most states also require parallel notice filings ("blue sky" notices) with similar timing. Failure to file timely does not by itself void the exemption but signals non-compliance. Form D is the SEC notice filing required for offerings made under Regulation D. Issuers must file Form D within 15 days after the first sale of securities. Form D provides basic information about the offering, issuer details, exemption claimed, offering amount, types of investors, and related persons, without the disclosure burdens of a registered offering. Most states also require parallel notice filings ("blue sky" notices) with similar timing. Authority SEC regulation: 17 C.F.R. § 230.503 (Form D requirement). EDGAR filing system. Texas notice filing: Tex. Gov't Code § 4005.024 ; Texas State Securities Board Rule 109.13. NSMIA preemption: 15 U.S.C. § 77r(b)(4) . Filing timing Form D must be filed within 15 days after the first sale. "First sale" is the date the first investor becomes legally bound to purchase (typically execution of subscription agreement, not closing/funding). Amendment is required: (1) annually for ongoing offerings; (2) when material information changes; (3) at offering closing/termination. The 15-day deadline is short, issuers should prepare Form D in parallel with offering documents. Form D content Form D requires disclosure of: (1) issuer information , name, address, jurisdiction, year of incorporation, type; (2) related persons , executive officers, directors, promoters; (3) offering details , exemption claimed (504, 506(b), 506(c)), date of first sale, duration, offering size, amount sold, minimum investment; (4) investor information , number and types (accredited vs. non-accredited); (5) use of proceeds ; (6) sales compensation paid to brokers; (7) certification . Form D is publicly accessible on EDGAR; sensitive business information should not be included. State notice filings Most states require parallel notice filings for Rule 506 offerings. Standard requirements: copy of Form D filed with state regulator; filing fee ($200-$1,000 typically); consent to service of process; specific state forms in some jurisdictions. Texas notice filing through the Texas State Securities Board includes copy of Form D, filing fee, Form U-2 (consent to service); typically due within 15 days of first sale to a Texas resident. NSMIA preempts state registration for Rule 506 offerings (covered securities), but states retain authority to require notice filings, fees, and anti-fraud enforcement. Consequences of late or missed filings Failure to file timely has graduated consequences: (1) SEC level , failure to file does not by itself void the Reg D exemption, but signals non-compliance; SEC has authority to impose disqualification from future Reg D under Rule 507; (2) state level , varies; some states treat failure to notice-file as voiding state-law preemption; (3) investor relations , sophisticated investors review EDGAR for Form D filings; (4) future fundraising , pattern of late filings can complicate due diligence in subsequent rounds, M&A, or IPO. Best practice: file timely, even if Form D requires amendment for unfinished details. Public accessibility Form D filings are publicly accessible through EDGAR. Competitors and observers can see offering details, including issuer name, offering size, and number of investors. Sophisticated journalists, financial reporters, and competitive intelligence services routinely monitor Form D filings. Some issuers prefer to delay disclosure of fundraising for competitive or strategic reasons, but the 15-day window typically forces disclosure shortly after first sale. Practical context For Texas issuers, Form D is administrative but cannot be skipped. Best practice: (1) prepare Form D in parallel with offering documents; (2) file within 15 days of first sale; (3) coordinate state notice filings, Texas State Securities Board notice required for sales to Texas residents; (4) amend Form D for material changes during ongoing offerings; (5) annual amendment for 1-year-plus offerings; (6) closing amendment when offering terminates; (7) maintain documentation of filings. For investors: (1) Form D filings on EDGAR provide public confirmation of offering details; (2) absence of Form D after expected fundraising raises diligence questions. Common pitfall: issuers focused on closing offerings forget the 15-day deadline. Related Terms Regulation D · Accredited Investor · Texas Securities Act · Private Placement Memorandum · Regulation CF Form I-9 / Employment Eligibility Verification § The federal employment eligibility verification form required by the Immigration Reform and Control Act of 1986 (IRCA, 8 U.S.C. § 1324a). All U.S. employers must verify identity and work authorization of every new hire, regardless of citizenship status, by completing Form I-9 and examining acceptable documentation. Penalties for I-9 violations range from $281 to $27,894+ per violation (2024 inflation-adjusted). E-Verify is a parallel federal electronic verification program, voluntary in most contexts, mandatory for federal contractors. Form I-9, formally "Employment Eligibility Verification", is the federal form required by the Immigration Reform and Control Act of 1986 (IRCA) for all employees hired in the United States. All U.S. employers must verify identity and work authorization of every new hire by completing Form I-9 and examining acceptable documentation. The verification requirement applies regardless of citizenship status, U.S. citizens must complete I-9 just as foreign nationals do. Compliance is operationally simple in concept but technically detail-driven; ICE and the DOJ enforce I-9 violations actively, and penalties can be substantial. Authority Federal statute: Immigration Reform and Control Act of 1986 (IRCA), 8 U.S.C. § 1324a . Implementing regulations: 8 C.F.R. § 274a.1 et seq. Form I-9: published by USCIS; updated periodically. E-Verify program: 8 U.S.C. § 1324a note ; voluntary for most employers, mandatory for federal contractors (FAR 22.1802). Civil penalty inflation adjustments: 28 C.F.R. § 85.5 . Texas: no state E-Verify mandate for private employers (some state contractor requirements per Tex. Gov't Code § 673.005). The verification process The I-9 process: (1) Section 1, Employee Information , completed by employee on or before first day of work; identifies employee and certifies citizenship/work-authorization status; (2) Section 2, Employer Review and Verification , completed by employer within 3 business days of hire; employer examines documentation establishing identity and work authorization; (3) Section 3, Reverification and Rehires , completed when work authorization expires or rehiring within 3 years. The employer's Section 2 examination is critical: documents must reasonably appear genuine and relate to the employee. Employers cannot specify which documents the employee must present from the acceptable lists. Acceptable documents Form I-9 includes three lists of acceptable documents: (1) List A , both identity and work authorization (U.S. passport, permanent resident card, employment authorization document); (2) List B , identity-only (driver's license, state ID, school ID); (3) List C , work authorization (Social Security card, birth certificate, certain INS-issued documents). Employee presents either one List A document OR one List B AND one List C document. Employers cannot demand specific documents, employee chooses from acceptable lists. Demanding more or different documents than required is "document abuse", a separate IRCA violation. Storage and retention I-9 retention requirements: forms must be retained for 3 years from date of hire OR 1 year from termination, whichever is later . Employers may retain on paper or electronically. Recommended practice: maintain I-9s separately from personnel files to facilitate audit response. ICE inspections typically request I-9s within 3 business days of subpoena. E-Verify program E-Verify is the federal electronic employment-eligibility verification system. The program is: (1) voluntary for most employers ; (2) mandatory for federal contractors with covered contracts; (3) mandatory in some states (Texas does not mandate E-Verify for private employers). E-Verify supplements but does not replace I-9, employers must still complete I-9 even when using E-Verify. Penalties I-9 penalties (2024 inflation-adjusted): (1) paperwork violations , $281 to $2,789 per violation (first offense); (2) knowingly hiring or continuing to employ unauthorized worker , $698 to $5,579 per violation (first offense); up to $27,894 per violation (third+ offense); (3) document fraud , separate criminal and civil penalties; (4) discriminatory practices , additional penalties under IRCA's anti-discrimination provisions. Violations multiply quickly: a single audit identifying paperwork violations on dozens of I-9s can generate substantial total exposure. Anti-discrimination provisions IRCA's anti-discrimination provisions (8 U.S.C. § 1324b) prohibit: (1) citizenship status discrimination in hiring, firing, recruitment; (2) national origin discrimination in employment; (3) document abuse ; (4) retaliation for exercising IRCA rights. Common violations: requiring permanent residents to show specific documents while accepting other documents from citizens; rejecting valid Employment Authorization Documents because they expire; applying I-9 procedures inconsistently among different ethnic groups. Practical context For Texas employers, I-9 compliance is universal, every new hire requires completion regardless of citizenship status. Best practice: (1) maintain centralized I-9 administration with trained personnel; (2) use current I-9 form; (3) complete Section 1 by first day, Section 2 within 3 business days; (4) retain I-9s separately from personnel files; (5) conduct periodic self-audits to identify and correct errors before ICE inspection; (6) train hiring personnel on document acceptance, never demand specific documents; (7) for federal contractors, comply with E-Verify mandate. Common pitfalls: hiring managers rejecting valid documents because they look unfamiliar; failure to track work-authorization expirations; improper storage of I-9s in personnel files. Companion article: Before Firing an Employee Related Terms Independent Contractor · Title VII · Workplace Discrimination · Texas Workforce Commission · Sanctions G Garnishment § A post-judgment collection device by which a judgment creditor reaches the judgment debtor's property held by a third party (the garnishee), most commonly bank accounts and accounts receivable. Texas garnishment is governed by Tex. R. Civ. P. 657-679 and Tex. Civ. Prac. & Rem. Code Ch. 63. Wage garnishment for ordinary debts is unconstitutional under Texas law (Tex. Const. art. XVI § 28), with narrow exceptions for child support, taxes, and student loans. Garnishment is a post-judgment collection device by which a judgment creditor reaches property of the judgment debtor that is in the possession of a third party (the "garnishee"). The most common targets are bank accounts (held by the debtor's bank) and accounts receivable (held by the debtor's customers). Texas is the most restrictive state on wage garnishment, the Texas Constitution (Article XVI, Section 28) prohibits wage garnishment for ordinary debts, with narrow exceptions for child support, federal taxes, and federal student loans. Authority Texas Constitution: Tex. Const. art. XVI, § 28 (no garnishment of "current wages for personal service"). Statutory framework: Tex. Civ. Prac. & Rem. Code Ch. 63 (Garnishment); procedural rules: Tex. R. Civ. P. 657-679 . Pre-judgment garnishment requirements: Tex. R. Civ. P. 658 . Bond requirements: § 63.001(2) ; Rule 658a . Garnishee's answer: Rule 666 . Personal property exemptions: Tex. Prop. Code Ch. 42 . Pre-judgment vs. post-judgment garnishment Texas allows both pre-judgment and post-judgment garnishment, with different prerequisites: (1) pre-judgment requires a sworn affidavit showing the debt is just, due, and unpaid; the defendant has not, within the creditor's knowledge, sufficient property within the state subject to execution; and the garnishment is not sought to injure the defendant or garnishee. Pre-judgment garnishment requires a bond. (2) Post-judgment requires a final, valid, subsisting judgment, a bond is not required for post-judgment garnishment, and the procedural showing is simpler. Most commercial garnishment is post-judgment. The constitutional wage prohibition Tex. Const. art. XVI, § 28 provides: "No current wages for personal service shall ever be subject to garnishment, except for the enforcement of court-ordered child support payments." This is the most lender-unfriendly garnishment regime in the United States. Federal exceptions exist for: (1) child support (mandatory under federal law); (2) federal income tax obligations; (3) federal student loans; (4) federal court-ordered restitution. State income tax, not applicable to Texas residents on Texas wages, since Texas has no income tax. Wages "currently due" are protected; once paid into a bank account, the funds become subject to garnishment as bank deposits (with exemption-tracing complications). Bank account garnishment Bank account garnishment is the workhorse of Texas commercial collection. The judgment creditor: (1) files a sworn application identifying the judgment, the debtor, and the bank as garnishee; (2) the court issues a writ of garnishment served on the bank; (3) upon service, the bank freezes the debtor's account up to the judgment amount; (4) the bank files an answer disclosing the account balance and any claimed exemptions; (5) the court enters judgment against the bank for the disclosed funds (less exemptions). The frozen funds are paid to the creditor in satisfaction or partial satisfaction of the underlying judgment. Accounts receivable garnishment Accounts receivable garnishment reaches amounts owed to the debtor by its customers. Procedurally similar to bank garnishment, but the customer must determine and disclose what amounts are owed. Effective for capturing in-flight payment obligations, but typically reaches only specific identifiable receivables, not future amounts that will become owing. Sophisticated debtors can drain receivables through accelerated billing or factoring before garnishment service; speed matters. Exemptions and traceability Garnished funds remain subject to property-exemption claims under Tex. Prop. Code Ch. 42, homestead, retirement accounts, and other statutory categories. The debtor must affirmatively claim exemptions; failure to claim waives them. Exemption tracing on bank accounts is complex: funds deposited from exempt sources (Social Security, retirement) retain their exempt status if traceable, but commingling with non-exempt funds creates evidentiary disputes. Wage funds in bank accounts may also retain their constitutional protection under some Texas case law for a period after deposit, though the doctrine is narrow. Multi-state considerations For interstate enforcement, the judgment creditor typically domesticates the foreign judgment under the Texas Uniform Enforcement of Foreign Judgments Act ( Tex. Civ. Prac. & Rem. Code Ch. 35 ) before garnishing Texas-located assets. Out-of-state debtor with Texas bank accounts: the garnishment must be issued in Texas, served on the Texas bank branch. Out-of-state bank accounts are reached through garnishment in the bank's home state. Practical context For Texas judgment creditors, garnishment is among the most effective collection tools, particularly when the debtor maintains accounts at known commercial banks. Best practice: (1) identify bank relationships through subpoenas of payment records, asset disclosure orders, or third-party investigations; (2) move quickly, sophisticated debtors will move funds upon learning of impending garnishment; (3) name multiple banks where bank relationships are uncertain; (4) prepare for exemption claims and tracing disputes; (5) coordinate garnishment with turnover and other post-judgment collection tools. For debtors, the constitutional wage protection is a meaningful asset preservation feature, Texas remains an attractive jurisdiction for individuals with substantial wage income facing creditor pressure, although bank-deposit captures partially erode the protection. Related Terms Turnover Order · Post-Judgment Interest · Supersedeas Bond · Default General Counsel § 2025 The chief legal officer of a corporation or other business entity, responsible for managing the entity's legal affairs and serving as the senior legal advisor to the board and management. The general counsel (GC) is the chief legal officer of a corporation or other business entity. The role includes overseeing internal legal staff, retaining and managing outside counsel, serving as the senior legal advisor to the board of directors and the executive team, managing litigation and regulatory exposure, supervising commercial transactions, and ensuring compliance with applicable laws and regulations. In public companies, the general counsel typically also serves as Corporate Secretary, with statutory responsibilities for board record-keeping, filing of corporate documents, and oversight of disclosure controls. In private companies and growth-stage businesses, the general counsel may operate as a one-person legal department or may build and manage a team. Fractional general counsel A "fractional GC" or "outside general counsel" is an arrangement in which an attorney provides general counsel services to a company on a part-time or recurring basis without becoming a full-time employee. This arrangement is common for businesses that are too large for ad-hoc outside counsel but not yet large enough to justify a full-time GC, typically in the $5M-$50M revenue range depending on industry and legal intensity. Authority The general counsel role is recognized in federal and state corporate disclosure regimes. Under SEC Regulation S-K § 401(b) , the general counsel is typically included as an executive officer subject to disclosure of compensation, related-party transactions, and conflicts. In public companies, the general counsel role intersects with the audit committee and the chief compliance officer functions under various NYSE and Nasdaq listing standards. Generative AI Output § 2026 Content produced by a generative artificial intelligence system. Under current U.S. copyright doctrine, AI-generated content lacking sufficient human creative input is not copyrightable. Works combining AI assistance with substantial human authorship remain protectable for the human-authored portions only. Generative AI output is content, text, images, audio, video, or code, produced by an artificial intelligence system from a user prompt or input. Under current U.S. copyright doctrine, content produced by an AI system without substantial human creative input is not copyrightable. The legal framework governing ownership, allocation of risk, and use of generative AI output in commercial contexts continues to develop rapidly. Authority Copyright Act, 17 U.S.C. § 102 (subject matter requires authorship); § 411 (registration as suit prerequisite). Controlling appellate authority: Thaler v. Perlmutter , 130 F.4th 1009 (D.C. Cir. 2025) (Copyright Act requires human authorship), cert. denied, No. 25-449 (Mar. 2, 2026). U.S. Copyright Office, Copyright and Artificial Intelligence, Part 2: Copyrightability (Jan. 2025) (prompts alone are insufficient human contribution). Texas Responsible Artificial Intelligence Governance Act (TRAIGA), effective January 1, 2026 (codified within Tex. Bus. & Com. Code, amending the TDPSA). Authorship and copyrightability Thaler v. Perlmutter (D.C. Cir. 2025) affirmed the U.S. Copyright Office's denial of registration for a work created entirely by an AI system. The court held that the Copyright Act of 1976 requires human authorship as a matter of statutory law. The Supreme Court denied certiorari in March 2026, leaving the D.C. Circuit's holding intact. The Copyright Office's January 2025 guidance further clarified that prompt engineering alone, even highly detailed iterative prompting, does not provide the human creative control necessary to establish authorship of the AI output. Hybrid works Works that combine AI-generated portions with substantial human authorship remain protectable, but only the human-authored portions are protected. A novel written by a human that incorporates AI-generated illustrations would be copyrightable as to the text but not as to the illustrations. The Copyright Office requires applicants to disclaim AI-generated portions during registration; failure to disclose can render the resulting registration unenforceable. Training data and output infringement risk Pending litigation against major AI developers raises distinct infringement questions concerning (1) the use of copyrighted material in training datasets and (2) AI outputs that closely resemble specific copyrighted works in the training data. These questions remain unresolved across the federal circuits. Texas businesses using generative AI in commercial production should treat infringement risk as live and govern accordingly through indemnification provisions in their AI vendor contracts. Texas TRAIGA framework The Texas Responsible Artificial Intelligence Governance Act took effect January 1, 2026. TRAIGA imposes obligations on persons and entities developing or deploying AI in Texas, amends the TDPSA to clarify processor obligations for AI-handled data, and clarifies application of the Texas Capture or Use of Biometric Identifiers Act to AI training data. Enforcement authority is vested in the Texas Attorney General. Practical context Texas businesses incorporating generative AI into operations should (1) document human creative contributions to any work that may be commercialized; (2) negotiate indemnification from AI vendors for infringement claims arising from outputs; (3) review TRAIGA obligations as a controller or deployer; and (4) avoid relying on copyright as the protection mechanism for AI-generated marketing assets, code, or product designs. Where copyright fails, contract, trade secret, and trademark remain viable protection layers. Related Terms Copyright · Work-for-Hire Doctrine · Trade Secret · Texas Data Privacy and Security Act · License Agreement Guaranty Agreement § A contract by which a guarantor agrees to be secondarily liable for the obligation of a primary obligor to a third party. Fundamental to commercial credit, landlords require lease guarantees, banks require personal guarantees from business owners, vendors require parent-company guarantees of subsidiaries. A guaranty agreement is a contract by which one party (the "guarantor") agrees to be secondarily liable for the obligation of another party (the "primary obligor") to a third party (the "guaranteed party," typically a creditor). If the primary obligor defaults, the guaranteed party may pursue the guarantor for performance. Guaranty agreements are fundamental to commercial credit, landlords require lease guarantees, banks require personal guarantees from business owners, vendors require parent-company guarantees of subsidiaries. Authority Texas common law; Republic National Bank of Dallas v. Northwest National Bank of Fort Worth , 578 S.W.2d 109 (Tex. 1978) (guaranty as secondary obligation). Statute of frauds: Tex. Bus. & Com. Code § 26.01(b)(2) (suretyship/guaranty must be in writing). Loan agreements: § 26.02 . Distinguished from suretyship Texas merges common-law distinctions between guaranty and suretyship for most purposes, treating both as secondary contractual obligations. The principal practical difference: a guarantor's liability typically attaches only on the primary obligor's default, while a surety's liability may be coextensive with the primary obligor. Continuing vs. limited guaranty A continuing guaranty covers all obligations of the primary obligor incurred during the guaranty period, including future obligations. A limited guaranty is restricted to a specific obligation, dollar amount, or time period. Continuing guaranties typically include language specifying that the guaranty cannot be revoked as to existing debt and survives the death or incapacity of an individual guarantor. Common limitations a guarantor may negotiate (1) Cap on guaranty amount; (2) maximum duration; (3) notice of default before guaranty obligation triggers; (4) preservation of defenses available to the primary obligor; (5) carve-outs for specific events (e.g., guarantor's interest sold). Lenders typically resist these limitations; guarantors should always seek them. Defenses to guaranty enforcement Texas recognizes few defenses against a clear written guaranty: failure of consideration (rare in commercial context); fraud in the inducement; statute of limitations; modification of the underlying obligation without guarantor consent (in some circumstances). General unfairness or hardship is not a defense. Practical context Personal guarantees from business owners are nearly universal in Texas commercial lending to closely-held businesses. Sophisticated guarantor-side practice involves negotiating limitations before signing, once executed, Texas guarantees are very difficult to escape. Owners signing guarantees should understand they are personally on the hook for amounts that often exceed their personal net worth. Companion article: Commercial Leases in Texas Related Terms Promissory Note · Security Interest · Statute of Frauds H Hold-Harmless Clause § A contractual provision under which one party agrees to bear the responsibility for specified liabilities of another, often paired with an indemnification obligation. Texas authorities historically have not always sharply distinguished hold-harmless from indemnification, but modern commercial practice typically uses combined "indemnify, defend, and hold harmless" language to cover three distinct obligations: reimbursement (indemnify), defense management (defend), and primary responsibility (hold harmless). Subject to express-negligence rule for clauses covering the holder's own negligence. A hold-harmless clause is a contractual provision under which one party agrees to bear responsibility for specified liabilities of another. Hold-harmless provisions are typically paired with indemnification obligations, combined "indemnify, defend, and hold harmless" language is the standard formulation in modern commercial contracts. Texas authorities have not always sharply distinguished hold-harmless from indemnification; many courts treat them as functionally synonymous, while others identify subtle differences. The combined three-part formulation captures all related obligations and avoids interpretive disputes. Authority Hold-harmless and indemnification overlap heavily in Texas case law. Express negligence rule applies to hold-harmless provisions covering holder's own negligence: Ethyl Corp. v. Daniel Constr. Co. , 725 S.W.2d 705 (Tex. 1987). Conspicuousness requirement: Dresser Industries, Inc. v. Page Petroleum, Inc. , 853 S.W.2d 505 (Tex. 1993). Statutory restrictions parallel to indemnification: Tex. Ins. Code Ch. 151 (Texas Construction Anti-Indemnity Act); Tex. Civ. Prac. & Rem. Code Ch. 127 (Texas Oilfield Anti-Indemnity Act). Discussion of the indemnify/defend/hold-harmless distinction: various Texas appellate decisions and commercial-contract treatises. See also Indemnification (Contractual) . The indemnify/defend/hold-harmless trio Modern commercial practice typically uses three obligations together: (1) indemnify , reimburse the indemnitee for losses paid; the obligation to make the indemnitee whole after a covered loss; (2) defend , assume the defense of underlying claims; the obligation to provide and pay for defense counsel and management; (3) hold harmless , bear primary responsibility for the covered matters; the obligation to absorb the risk regardless of payment by the indemnitee. The three obligations operate at different points in the claim lifecycle, defense at suit, hold-harmless throughout, indemnification at settlement or judgment. Combined "indemnify, defend, and hold harmless" language ensures all three. Texas case law treatment Texas courts have not consistently distinguished hold-harmless from indemnification. Some authorities (and influential treatises) describe hold-harmless as covering the obligation to assume responsibility (to "hold" the indemnitee "harmless" from liability) while indemnification covers the reimbursement obligation (to make whole after loss). Other authorities treat the terms as effectively synonymous. The Texas Supreme Court has not definitively resolved the distinction. Practical implication: drafters should not rely on the choice between "indemnify" and "hold harmless" to make a meaningful difference; use both terms to capture the full obligation. Express negligence and conspicuousness Hold-harmless provisions covering the holder's own negligence are subject to the same fair-notice rules as indemnification: (1) express negligence rule from Ethyl Corp. v. Daniel Construction (Tex. 1987), the clause must specifically state that it covers the holder's own negligence; boilerplate "any and all liability" language is insufficient. (2) conspicuousness from Dresser Industries v. Page Petroleum (Tex. 1993), the language must be conspicuous in the contract (bold, ALL CAPS, separate captioned section). Both rules apply to hold-harmless clauses just as they apply to indemnification clauses; sophisticated drafters use bold, ALL CAPS, separately captioned language for the operative obligations. Statutory limitations parallel indemnification Texas's industry-specific anti-indemnity statutes apply equally to hold-harmless provisions: (1) Texas Construction Anti-Indemnity Act (Tex. Ins. Code Ch. 151), voids construction-contract provisions requiring an indemnitor to hold an indemnitee harmless from the indemnitee's own negligence; limited exceptions for additional insured arrangements; (2) Texas Oilfield Anti-Indemnity Act (Tex. Civ. Prac. & Rem. Code Ch. 127), limits broad-form hold-harmless arrangements in oilfield-service contracts. Drafting a hold-harmless clause in these contexts requires the same statutory analysis as indemnification. Insurance coverage of hold-harmless The CGL insured-contract exception that covers most contractual indemnification (see Commercial General Liability Insurance ) applies equally to hold-harmless provisions. The standard CGL "insured contract" definition includes any contract or agreement under which the insured assumes the tort liability of another, covering both indemnification and hold-harmless arrangements within the contractual liability framework. The CGL responds to defense and indemnity obligations under hold-harmless provisions just as it does for traditional indemnification. Coordination of contractual indemnification with insurance coverage applies equally to hold-harmless drafting. Common drafting structures Standard hold-harmless drafting integrates with broader indemnity provisions: (1) combined trio , "shall indemnify, defend, and hold harmless [Indemnitee] from any and all claims..."; (2) scope specification , types of claims covered (third-party claims, direct breach, specific identified matters); (3) express negligence , bold/caps reference to indemnitee's own negligence where intended; (4) carve-outs , exceptions for indemnitee's gross negligence, willful misconduct, intentional acts; (5) defense procedures , notice, defense election, cooperation, settlement consent; (6) caps and survival , limits on amount and time. Each element should be drafted with the parties' specific risk allocation in mind. The "harmless" obligation in practice The hold-harmless obligation imposes ongoing responsibility distinct from defense and indemnity. Practical examples: (1) insurance maintenance , the holding party may be obligated to maintain insurance covering the held-harmless party's exposure; (2) operational responsibility , assuming primary responsibility for compliance, operations, or claims handling; (3) communication and reporting , obligations to keep the held-harmless party informed; (4) continuing risk management , implementing controls to prevent claims rather than just responding to them. Sophisticated contracts specify these operational expectations rather than relying on the bare "hold harmless" language. Practical context For Texas commercial parties, hold-harmless clauses are inseparable from indemnification in modern practice. Best practice: (1) use combined "indemnify, defend, and hold harmless" language to capture all related obligations; (2) draft scope precisely, identifying covered claims, parties, and circumstances; (3) ensure express-negligence and conspicuousness compliance for clauses covering holder's own negligence; (4) check industry-specific anti-indemnity statutes (TCAIA, TOAIA); (5) coordinate with CGL insured-contract coverage for insurance backstop; (6) include operational specifications (insurance maintenance, notice, cooperation) where the parties want continuing performance. Common drafting failure: using "hold harmless" alone without "indemnify", risking interpretive challenges to whether reimbursement is required or only assumption of risk. The combined trio formulation eliminates this issue. Related Terms Indemnification (Contractual) · Indemnification (Corporate) · Texas Construction Anti-Indemnity Act · Additional Insured · Limitation of Liability Clause Howey Test § The Supreme Court test for whether an arrangement is an “investment contract,” and therefore a security: an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. The Howey test comes from SEC v. W.J. Howey Co. (1946). An arrangement is an “investment contract,” and therefore a security subject to federal and state securities laws, if it involves (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profit, (4) derived predominantly from the efforts of others. The test reaches well beyond stocks and bonds. It is the framework courts and the SEC apply to novel instruments, including many digital assets and tokens. Whether a token is offered and sold as a security turns on the economic reality of the arrangement, not on the label the issuer chooses. Classification drives everything downstream: registration or a valid exemption such as Regulation D , what may be said and to whom, and how an offering is structured. Resolving the Howey question at the outset is far cheaper than restructuring an offering already underway. Authority SEC v. W.J. Howey Co., 328 U.S. 293 (1946) ; Securities Act of 1933 § 2(a)(1) (definition of “security”). Texas application Texas applies a substantively similar analysis under the Texas Securities Act, recodified at Tex. Gov't Code Title 12, Subtitle B . An instrument that is a security under Howey is generally subject to Texas registration or exemption requirements as well as federal ones. HSR Premerger Notification § 2026 The federal antitrust premerger notification regime under the Hart-Scott-Rodino Act (15 U.S.C. § 18a). Parties to certain mergers and acquisitions must notify the FTC and DOJ Antitrust Division and observe a 30-day waiting period before closing. The 2026 "size of transaction" threshold is $133.9 million (effective February 17, 2026), with a "size of person" test for transactions under $535.5 million. Failure to file properly carries civil penalties up to $53,088 per day. HSR premerger notification is the federal antitrust regime requiring parties to certain mergers and acquisitions to notify the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division and observe a waiting period before consummating the transaction. Codified in the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the regime gives the antitrust agencies an opportunity to review transactions for potential anticompetitive effects before closing. Thresholds and fees adjust annually based on changes in gross national product; 2026 thresholds took effect February 17, 2026. Authority Federal HSR Act: 15 U.S.C. § 18a (Section 7A of the Clayton Act). HSR Rules: 16 C.F.R. Parts 801-803 . Annual threshold adjustments: published by FTC each January, effective ~30 days after Federal Register publication. 2026 thresholds: 91 FR 2133 (effective Feb. 17, 2026). Filing fees: 2023 Consolidated Appropriations Act (Merger Filing Fee Modernization Act). Civil penalties: up to $53,088 per day of noncompliance (as of Jan. 20, 2026, per Federal Register adjustments under the Federal Civil Penalties Inflation Adjustment Act). Form developments: revised HSR form effective Feb. 10, 2025; vacated by federal district court Feb. 12, 2026 (with stays and appeals pending). The 2026 jurisdictional thresholds Effective February 17, 2026, the HSR thresholds are: (1) Size of Transaction : $133.9 million (up from $126.4 million in 2025). Transactions below this threshold are not reportable. (2) Size of Person : applies to transactions valued between $133.9 million and $535.5 million; one party must have annual net sales or total assets of $267.8 million, the other party $26.8 million. (3) All transactions above $535.5 million : reportable regardless of party size. The thresholds are adjusted annually based on changes in gross national product. The 30-day waiting period HSR-reportable transactions trigger an initial 30-calendar-day waiting period during which the parties may not close. The agencies use the period for preliminary review. Possible outcomes: (1) expiration of waiting period , most common; transaction can close; (2) early termination , formerly available on request; suspended by FTC in 2021 and not generally available in 2025-2026; (3) second request , formal request for additional information triggering an extended waiting period (typically 30 days from substantial compliance with the request). Second requests are time-consuming and expensive (often $1M+ in legal and economic-consulting fees) and signal substantive antitrust concern. Filing fees (2026) The 2026 filing fees, adjusted under the Merger Filing Fee Modernization Act (effective Feb. 17, 2026): six-tier structure based on transaction value, ranging from approximately $30,000 for the smallest reportable transactions to over $2.3 million for the largest. The fee is paid by the acquiring party at the time of filing. Failure to pay the correct fee can invalidate the filing and trigger penalties. The revised HSR form (2025) The FTC and DOJ implemented a substantially revised HSR form effective February 10, 2025, the first major form overhaul in decades. The revised form expanded required disclosures regarding competitive overlaps, vertical relationships, sales data, customer information, and document production. On February 12, 2026, a federal district court vacated the new form, with the court staying its decision for seven days. Subsequent litigation and appeals are ongoing as of early 2026; parties should confirm current form requirements with counsel before filing. Common exemptions Several exemptions apply to otherwise-reportable transactions: (1) acquisitions of certain assets in the ordinary course of business (e.g., inventory, used equipment); (2) acquisitions of certain real property and unproductive assets ; (3) investment-only acquisitions by passive investors holding less than 10% (with limitations); (4) certain acquisitions of foreign assets and securities ; (5) intracompany transactions ; (6) certain bankruptcy reorganizations ; (7) regulated industries with concurrent regulatory review (banks, telecoms in some contexts). Each exemption has specific technical requirements; counsel review is essential. Civil penalties for noncompliance Failure to file when required, or failure to observe the waiting period before closing, carries civil penalties up to $53,088 per day of noncompliance (as adjusted annually). Penalties accrue from the date the filing should have been made through the date corrective action is taken. The DOJ has actively enforced HSR violations in recent years, including multimillion-dollar settlements for failures to notify successive transactions, technical violations of waiting periods, and failures to update prior filings. Section 8 of the Clayton Act HSR practice often involves analysis of Section 8 of the Clayton Act, which prohibits interlocking directorates between competing corporations meeting threshold conditions. The 2026 Section 8 thresholds: $54,402,000 minimum size (capital, surplus, undivided profits) and $5,440,200 minimum competitive sales. The de minimis exceptions exclude small interlocks. Recent DOJ enforcement focus on Section 8 has expanded its practical importance for board appointments by activist investors and private equity sponsors. Practical context For Texas businesses involved in M&A above the threshold range, HSR planning is gating. Best practice: (1) confirm jurisdictional thresholds at the contemplated closing date, not signing date; (2) engage HSR counsel early to identify exemptions and prepare filings; (3) build the 30-day waiting period (plus potential second-request extension) into transaction timelines; (4) prepare for revised-form requirements (subject to ongoing litigation); (5) consider antitrust risk allocation in transaction documents, break fees, "hell-or-high-water" covenants, divestiture obligations; (6) coordinate Section 8 analysis for board appointment provisions. For mid-market transactions below the threshold, HSR is typically not required but Section 7 of the Clayton Act remains in force, anticompetitive transactions can still be challenged regardless of reportability. Companion article: Business Divorces in Texas Related Terms Asset Purchase · Stock Purchase · Merger · Due Diligence · Closing Conditions I Indemnification Cap § The maximum aggregate amount a seller may be obligated to pay under the indemnification provisions of an M&A agreement. Limits seller exposure for breach of representations and warranties. An indemnification cap is the maximum aggregate amount a seller may be obligated to pay under the indemnification provisions of an M&A agreement. The cap limits the seller's exposure for breach of representations and warranties and provides cost certainty for the post-closing period. Authority No statutory authority, caps are creatures of contract. Cap categories General cap: applies to breach of general representations and warranties. Typical sizing in current Texas market: 10%–15% of enterprise value where RWI is not used; reduced to RWI retention level (~0.5% of EV) where RWI replaces seller indemnity. Fundamental cap: applies to breach of fundamental reps (organization, capitalization, authority, ownership) and certain other specified items. Typically equal to 100% of purchase price. Special indemnity caps: apply to specifically identified risks (pre-closing environmental, identified litigation, tax). Negotiated separately based on the particular risk's expected severity. Carve-outs from the cap Most caps exclude: (1) fundamental reps; (2) tax reps; (3) fraud or intentional misrepresentation; (4) covenants; (5) specific indemnities. Fraud carve-outs are essentially universal, sellers cannot contractually limit liability for fraud under Texas law in most circumstances. RWI implications Buy-side RWI policy limits typically range from 10% to 30% of enterprise value, sized to provide indemnification coverage above the seller's contractual cap (or in lieu of any seller cap). A "tower" of indemnification often runs: escrow → seller direct cap → RWI policy → uninsured exposure. Companion article: Selling Your Business in Texas Related Terms Indemnification (M&A) · Basket / Deductible · Representations and Warranties · Escrow Indemnification (Contractual) § A contractual provision under which one party agrees to compensate another for specified losses, typically losses arising from third-party claims. Distinct from but often paired with hold-harmless provisions. Texas applies the "express negligence rule" (Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705 (Tex. 1987)) requiring that an indemnity covering the indemnitee's own negligence be expressed in the contract clearly and conspicuously. Subject to several statutory limitations including the Texas Construction Anti-Indemnity Act. A contractual indemnification (or "indemnity") is a provision under which one party (the indemnitor) agrees to compensate another (the indemnitee) for specified losses, typically losses arising from third-party claims. Indemnification is the principal contractual mechanism for shifting risk between parties; properly drafted indemnities can transfer most or all of the financial consequences of specified events. Texas law imposes specific drafting requirements on indemnification covering the indemnitee's own negligence, plus statutory limitations in specific industries. Authority The express negligence rule: Ethyl Corp. v. Daniel Constr. Co. , 725 S.W.2d 705 (Tex. 1987) (indemnity covering indemnitee's own negligence must be expressed in the contract). Conspicuousness requirement: Dresser Industries, Inc. v. Page Petroleum, Inc. , 853 S.W.2d 505 (Tex. 1993) (fair-notice rules: indemnities must be both expressly stated and conspicuous). Construction-industry overlay: Tex. Ins. Code Ch. 151 (Texas Construction Anti-Indemnity Act). Oilfield indemnity: Tex. Civ. Prac. & Rem. Code Ch. 127 (Texas Oilfield Anti-Indemnity Act). Indemnification of corporate officers and directors: Tex. Bus. Orgs. Code §§ 8.101-8.104 . Federal counterpart for products liability: contributory pro rata rules vary by jurisdiction. The express negligence rule Ethyl Corp. v. Daniel Construction Co. (Tex. 1987) is the foundational Texas case on indemnification covering the indemnitee's own negligence. The rule: an indemnity that purports to require the indemnitor to compensate the indemnitee for the indemnitee's own negligence must "expressly state" that intention in the contract. Boilerplate "indemnify and hold harmless from any and all claims" language is insufficient, the indemnity must specifically reference negligence (e.g., "including indemnitee's own negligence"). The rule serves a notice function: parties accepting open-ended indemnities should be on clear notice of what they're agreeing to. The conspicuousness requirement Dresser Industries v. Page Petroleum (Tex. 1993) extended the express-negligence rule with a conspicuousness requirement: the indemnity language must be conspicuous in the contract, typically achieved through bold text, capitalization, larger font, or a separate captioned section. Fine-print indemnities buried in standard terms can be unenforceable even if expressly worded. Best practice for indemnity drafting: (1) use BOLD or ALL CAPS for the operative indemnity language; (2) place under a clearly captioned section heading; (3) reference "INDEMNITEE'S OWN NEGLIGENCE" expressly where intended. Hold-harmless provisions "Hold harmless" provisions are often paired with indemnification provisions, but the Texas relationship between the two has been the subject of litigation. Some authorities treat them as synonymous; others distinguish (with hold-harmless covering only the obligation to assume liability, indemnity covering reimbursement). Modern Texas commercial practice typically uses combined "indemnify, defend, and hold harmless" language to cover all three obligations: (1) indemnify , reimburse for losses paid; (2) defend , assume defense costs and management of underlying claim; (3) hold harmless , bear primary responsibility. Each obligation has distinct insurance and operational implications. Statutory limitations, TCAIA The Texas Construction Anti-Indemnity Act (Tex. Ins. Code Ch. 151, eff. Jan. 1, 2012) makes void and unenforceable indemnification provisions in construction contracts that require an indemnitor to indemnify against the indemnitee's own negligence, willful misconduct, breach of contract, or violation of law. The TCAIA effectively reverses Ethyl/Dresser in the construction context. See Texas Construction Anti-Indemnity Act . Limited exceptions for specific contract types (additional insured arrangements, OCIPs). Statutory limitations, TOAIA The Texas Oilfield Anti-Indemnity Act (Tex. Civ. Prac. & Rem. Code Ch. 127) limits indemnification in oilfield service contracts. Mutual-indemnity provisions are permitted (each party indemnifies the other for its own employees and property); broad-form indemnities (one party indemnifying the other for the latter's own negligence) are generally void. The TOAIA is critical to oilfield-services contract drafting in Texas's substantial energy industry. Common indemnification structures Standard commercial indemnification provisions: (1) third-party claim indemnity , most common; covers losses from claims by non-parties (e.g., personal injury, property damage, IP infringement); (2) direct breach indemnity , covers losses from the indemnitor's own breach of representation or covenant (common in M&A); (3) tax indemnity , covers tax liabilities allocated to specific party (M&A, real estate); (4) specific indemnity , covers identified pre-closing matters (litigation, environmental, regulatory). Indemnification baskets, caps, and survival periods are heavily negotiated. Procedural mechanics Indemnity claims typically follow a notice-and-defense framework: (1) notice , indemnitee must provide written notice of a claim within stated period; (2) defense election , indemnitor may elect to assume defense; (3) cooperation , parties cooperate in defense; (4) settlement , typically requires indemnitor consent or, if defense was assumed, indemnitee consent. Failure to provide proper notice can limit indemnity recovery; assumption of defense can waive coverage defenses. Indemnification claim procedures should be carefully drafted and observed. Practical context For Texas commercial parties, indemnification is the workhorse of risk allocation. Best practice: (1) draft indemnities with the express-negligence rule and conspicuousness requirement in mind, use bold/caps for negligence-covering language; (2) check for industry-specific anti-indemnity statutes (construction, oilfield); (3) coordinate indemnity scope with insurance coverage to avoid gaps; (4) negotiate baskets, caps, and survival in M&A contexts; (5) include defense and hold-harmless obligations explicitly; (6) draft notice procedures with reasonable timeframes. Indemnity disputes often involve scope (what's covered), procedural compliance (was notice given), and damages calculation (consequential damages, mitigation), careful drafting prevents most disputes. Related Terms Indemnification (Corporate) · Indemnification (M&A) · Indemnification Cap · Texas Construction Anti-Indemnity Act · Limitation of Liability Clause Indemnification (Corporate) § 2025 The legal mechanism by which a Texas business entity protects its directors, officers, and other agents from financial loss arising from claims related to their service. Operates on a two-tier framework: mandatory indemnification (statutorily required) and permissive indemnification (subject to standards of conduct). Note: This entry covers entity-level indemnification of directors, officers, and agents under TBOC Chapter 8. For the M&A risk-allocation concept (seller's contractual obligation to compensate buyer for breach of representations and warranties), see Indemnification (M&A) . Indemnification is the legal mechanism by which a Texas business entity protects its directors, officers, and other agents from financial loss arising from claims related to their service. Texas indemnification operates on a two-tier framework: mandatory indemnification (statutorily required in specified circumstances) and permissive indemnification (authorized but not required, subject to standards of conduct and decisional procedures). The entity may also advance expenses before final disposition. Authority Tex. Bus. Orgs. Code Chapter 8 (Indemnification and Insurance), applicable to corporations, LLCs, partnerships, and other entities. Key sections: § 8.003 (limitations); § 8.005 (negligence, added 2021); § 8.051 (mandatory); § 8.052 (court-ordered); § 8.101 (permissive); § 8.102 (general scope); § 8.103 (decisional procedure); § 8.104 (advancement); § 8.151 (insurance). Mandatory indemnification (§ 8.051) An entity shall indemnify a governing person against reasonable expenses (including attorney's fees) incurred in a proceeding in which the person is a respondent in their official capacity, if the person is wholly successful, on the merits or otherwise, in defense of the proceeding . "Wholly successful" includes successful procedural defenses (e.g., dismissal for lack of jurisdiction), not solely vindication on the merits. Permissive indemnification (§§ 8.101, 8.102) An entity may indemnify a governing person against judgments, settlements, and reasonable expenses, provided the person (a) acted in good faith; (b) reasonably believed the conduct was in (or not opposed to) the entity's best interests; and (c) for criminal proceedings, had no reasonable cause to believe the conduct was unlawful. Permissive indemnification is not available where the person is found liable for breach of duty of loyalty, intentional misconduct, knowing violation of law, or improper personal benefit. § 8.102(b) . Decisional procedure (§ 8.103) Determinations under § 8.101 must be made by (1) majority vote of disinterested governing persons; (2) majority vote of a designated committee of disinterested governing persons; (3) special legal counsel; or (4) the owners. This procedure is essential, indemnification approvals are vulnerable to challenge when not followed. Advancement of expenses (§ 8.104) An entity may pay expenses in advance of final disposition, after receiving (1) a written affirmation of good-faith belief in meeting the standard, and (2) a written undertaking to repay if the final determination is adverse. Without advancement, directors and officers must fund their own defense costs and rely on later indemnification, often financially impossible during protracted litigation. Limitations in governing documents (§ 8.003) As amended effective September 1, 2021, restrictions on indemnification or advancement may appear in any "governing document" (formerly limited to the certificate of formation only). Mandatory indemnification under § 8.051 cannot be eliminated. Insurance (§ 8.151) An entity may purchase D&O insurance to protect persons in their official capacity, regardless of whether the entity would have power to indemnify under Chapter 8. This supplements (does not replace) statutory and contractual indemnification. Practical context Texas indemnification is more director-and-officer-protective than the law of some other states. Combined with SB 29's broader corporate-governance reforms, post-2021 Texas is one of the most attractive U.S. jurisdictions for entity domicile from a director-and-officer-liability perspective. Sophisticated governance documents pair Chapter 8 indemnification with charter exculpation under § 7.001 , D&O insurance under § 8.151 , and (where applicable) the codified business judgment rule under § 21.419 . Related Terms Director · Corporation · Limited Liability Company · Bylaws · Business Judgment Rule · Fiduciary Duty Indemnification (M&A) § In M&A, the contractual obligation of one party (typically the seller) to compensate the other (typically the buyer) for losses arising from breaches of representations, warranties, or covenants, or from specifically identified risks. Note: This entry covers the M&A risk-allocation concept. For entity-level indemnification of directors and officers under TBOC Chapter 8, see Indemnification (Corporate) . In M&A transactions, "indemnification" refers to the contractual obligation of one party (typically the seller) to compensate the other (typically the buyer) for losses arising from breaches of representations, warranties, or covenants, or from specifically identified risks. Distinct from corporate indemnification under TBOC Chapter 8 , that is the entity's protection of its directors and officers; this is the deal-level risk-shifting mechanism between buyer and seller. Authority No central TBOC provision, M&A indemnification is governed by contract and Texas common-law contract interpretation. Sources of indemnifiable loss Typical M&A indemnification covers: (1) breach of representations and warranties; (2) breach of pre-closing or post-closing covenants; (3) excluded liabilities (in asset purchases) or specifically retained liabilities; (4) "special indemnities" for identified risks (pending litigation, known environmental issues, contingent tax positions); (5) third-party claims arising from pre-closing matters. Limits on indemnification Indemnification obligations are typically capped (the "cap") and subject to a threshold or deductible (the "basket"). Survival periods limit the time within which claims must be brought. Specific carve-outs typically apply to fundamental reps, taxes, fraud, and special indemnities. Direct claim vs. third-party claim procedures Most agreements distinguish: (1) direct claims (buyer's own losses, asserted directly against seller), usually require notice within a specified period and a defined dispute-resolution mechanism; (2) third-party claims (claims by outsiders against buyer that trigger seller indemnification), usually require prompt notice, opportunity for seller to assume defense, and constraints on buyer's authority to settle without seller consent. Recovery sources Indemnification claims are typically satisfied through: (1) escrow / holdback (first source); (2) RWI policy (where applicable); (3) direct clawback from the seller; (4) setoff against earnout or deferred consideration. Most transactions establish a hierarchy among these sources. Practical context Indemnification is typically the most heavily-negotiated section of a Texas M&A agreement. The combination of survival period, cap, basket, escrow size, special indemnities, and RWI structure together determine the seller's post-closing liability profile. The 2025 RWI market has shifted typical structures toward smaller escrows and broader RWI coverage, with many deals now closing without any seller indemnity for general reps (RWI as the sole recovery mechanism). Companion article: Selling Your Business in Texas Related Terms Representations and Warranties · Disclosure Schedule · Basket / Deductible · Indemnification Cap · Escrow · Earnout Independent Contractor § A person or entity engaged to perform services but not as an employee, retaining control over manner and means of performance, providing services to multiple clients, bearing economic risk, and not subject to direct supervision. Classification has substantial tax, employment-law, and benefits consequences. An independent contractor is a person or entity engaged to perform services for another, but not as an employee, retaining control over the manner and means of performance, providing services to multiple clients, bearing economic risk, and not subject to direct supervision in the manner of an employee. The independent-contractor classification has substantial tax, employment-law, and benefits consequences. Authority Federal classification: IRS common-law factors; FLSA "economic realities" test, McLaughlin v. Hochmann Plastering Inc. , 615 F. Supp. 4 (D. Mass. 1985); 29 U.S.C. § 203(g) . Texas classification: Tex. Lab. Code § 201.041 (Texas Unemployment Compensation Act); 40 Tex. Admin. Code § 815.134 (TWC test). Tex. Lab. Code Ch. 91 (staff leasing) and Ch. 92 (worker classification). Federal common-law factors The IRS evaluates the right to control the manner and means of work, considering: behavioral control (instructions, training, supervision); financial control (investment in equipment, opportunity for profit/loss, payment method); and the relationship between the parties (written contracts, employee benefits, permanency, regularity). FLSA economic realities test Under FLSA, the economic realities of the working relationship, not the parties' label, control. Factors include: opportunity for profit or loss; investment by the worker; permanence of the relationship; degree of control by the employer; whether the work is integral to the employer's business; and the worker's skill and initiative. Texas classification (TWC) TWC applies its own twenty-factor test under 40 Tex. Admin. Code § 815.134 , similar to but not identical to the federal IRS factors. Misclassification under Texas law triggers unemployment insurance liability and penalties. Consequences of misclassification Misclassification of an employee as an independent contractor may result in: (1) unpaid employer-side payroll taxes (Social Security, Medicare, FUTA); (2) unpaid overtime under FLSA; (3) liability for unprovided benefits (health insurance, retirement contributions); (4) workers' compensation coverage gaps; (5) penalties under federal and state law. Practical context Independent-contractor classification is one of the most consequential employment-law decisions a Texas business makes. The classification affects tax liability, regulatory exposure, benefits costs, and litigation risk. Sophisticated practice involves applying both federal and Texas tests rigorously, documenting the business reasons for classification, and structuring the relationship, written agreement, payment method, control structure, to support the chosen classification. Companion article: Wage and Hour Compliance in Texas Related Terms Employment Agreement · At-Will Employment · Texas Payday Law · Fair Labor Standards Act Injunctive Relief § A court order directing a party to do or refrain from doing a specific act. Texas recognizes three principal forms based on duration: temporary restraining orders, temporary injunctions (preserving status quo through trial), and permanent injunctions (final relief on the merits). Injunctive relief is a court order directing a party to do or refrain from doing a specific act. Texas recognizes three principal forms of injunctive relief based on duration: temporary restraining orders (very short term, ex parte if necessary), temporary injunctions (preserving status quo through trial), and permanent injunctions (final relief on the merits). Each requires distinct procedural and substantive showings. Authority Tex. R. Civ. P. 680–693a (injunction procedure); Tex. Civ. Prac. & Rem. Code Ch. 65 (injunction substantive standards); Federal: Fed. R. Civ. P. 65 ; Winter v. Natural Resources Defense Council , 555 U.S. 7 (2008). Temporary restraining order (TRO) A TRO may be issued without notice to the opposing party where immediate and irreparable injury would occur before notice could be served. TRCP 680 . A TRO may not exceed 14 days, extendable for an additional 14 days for good cause. The applicant must post bond. Temporary injunction A temporary injunction preserves the status quo pending trial on the merits. To obtain a temporary injunction, the applicant must show: (1) a probable right to recover on the merits; (2) imminent and irreparable injury; (3) that there is no adequate remedy at law (damages alone are insufficient). Bond is required. TRCP 684 . Permanent injunction A permanent injunction is final relief entered after trial on the merits, requiring the party to do or refrain from specified acts. The applicant must show on the merits (1) a wrongful act; (2) imminent harm; (3) irreparable injury; (4) no adequate remedy at law. Butnaru v. Ford Motor Co. , 84 S.W.3d 198 (Tex. 2002). Bond requirement (TRCP 684) Both TROs and temporary injunctions require posting of a bond to indemnify the enjoined party for any damages caused if the injunction is later determined to have been wrongfully issued. Bond amount is set by the court. Practical context Injunctive relief is the principal remedy in trade-secret cases, noncompete disputes, and IP infringement matters where damages alone are inadequate. The "no adequate remedy at law" requirement is the most-litigated element, Texas courts construe it strictly, requiring a genuine showing that money damages cannot make the plaintiff whole. Companion article: Non-Competes in Texas Related Terms Trade Secret · Noncompete Agreement · Declaratory Judgment · Texas Business Court Intercreditor Agreement § A contract between two or more creditors of the same borrower governing their respective rights, priorities, and remedies vis-à-vis each other. Most common in capital structures with a senior secured lender and a junior or mezzanine lender. Addresses lien priority, payment subordination, enforcement standstills, voting rights in workouts, bankruptcy cooperation, and DIP financing rights. An intercreditor agreement is a contract between two or more creditors of the same borrower governing their respective rights, priorities, and remedies vis-à-vis each other. Intercreditor agreements are most common in multi-tier capital structures, senior secured lender plus junior or mezzanine lender, or first-lien plus second-lien lenders. The agreement allocates rights regarding the borrower's collateral, the timing and order of payment, enforcement actions, voting in restructurings, and behavior in bankruptcy. Although the borrower is typically a party (or signs an acknowledgment), the agreement's principal economic effect is between the creditors. Authority Intercreditor agreements derive their authority from general contract law and UCC priority rules. UCC priority framework: Tex. Bus. & Com. Code §§ 9.317-9.339 . Subordination agreements specifically authorized: § 9.339 (priority subject to subordination by agreement). Bankruptcy enforceability: 11 U.S.C. § 510(a) (subordination agreements enforceable in bankruptcy "to the same extent" as outside bankruptcy). Practical case law on intercreditor enforcement in bankruptcy: In re Erickson Retirement Communities, LLC , 425 B.R. 309 (Bankr. N.D. Tex. 2010) (intercreditor provisions enforceable in plan). Lien priority and lien subordination The core function of most intercreditor agreements is establishing lien priority, which creditor's security interest in the collateral is senior. Two principal models: (1) first-lien/second-lien structure, both creditors have liens on the same collateral, with the second-lien creditor expressly subordinated; (2) senior/mezzanine structure, senior creditor has lien on operating company assets, mezzanine creditor has lien on holding company equity (not on operating-company assets). The agreement specifies that the subordinated lien is junior in all respects, payment, enforcement, distribution of proceeds. Payment subordination Payment subordination provisions govern when junior creditor may receive payments. Two principal models: (1) deep payment subordination , junior receives no payments until senior is paid in full; (2) limited payment subordination , junior receives ordinary scheduled payments while no senior default exists, but junior payments are blocked during specified default conditions. Modern intercreditor agreements typically use limited payment subordination with payment blocks triggered by senior payment defaults or financial-covenant defaults. Enforcement standstills Enforcement standstills prohibit the junior creditor from taking enforcement action (foreclosure, lawsuit, exercise of remedies) against the borrower or collateral for a specified period after the senior creditor has been notified of a default. Standstill periods range from 90 to 180 days; some agreements use cumulative standstill caps. The senior lender uses the standstill period to formulate its enforcement strategy without competing junior-creditor actions undermining its position. Standstill expiration restores the junior's enforcement rights but typically still subject to senior priority. Bankruptcy provisions Intercreditor agreements address several bankruptcy issues: (1) cash collateral and DIP financing , junior creditor's agreement to support or not oppose senior's cash collateral and DIP financing positions; (2) plan voting , junior creditor's voting on plans of reorganization may be governed by intercreditor terms; (3) section 1111(b) elections , coordinating the parties' bankruptcy elections; (4) relief from stay , agreements about which creditor will pursue stay relief; (5) turnover , junior agrees to turn over to senior any payments received in violation of subordination. Section 510(a) of the Bankruptcy Code makes subordination agreements enforceable in bankruptcy. Buy-out rights and amendments Many intercreditor agreements grant the junior creditor a "buy-out right", the right to purchase the senior debt at par after a stated default period, putting the junior in the senior position. This can be an attractive option when the junior wants to control the workout. Senior creditors often include "no-amendment" provisions limiting junior's right to amend its own loan documents in ways adverse to senior (extending maturity, increasing principal, increasing payment terms beyond defined parameters). Practical context For Texas borrowers stacking multiple debt tranches, intercreditor agreements between the senior and junior lenders are typically negotiated between the lenders without significant borrower input, but the borrower's downstream operating flexibility is materially affected. Borrowers should understand: (1) which creditor controls workout discussions; (2) what default events block junior payments and could shift control; (3) whether mezzanine debt can be amended without senior consent; (4) how the structure interacts with potential equity financings or M&A. For lenders, intercreditor terms often determine the practical recovery curve in distress; the negotiation should reflect realistic stress scenarios rather than just the optimistic base case. Related Terms Promissory Note · Security Interest · Perfection · Default · Covenant (Financial) Interlocutory Appeal § 2024 An appeal taken from an order that does not finally dispose of the case. Texas allows interlocutory appeal only where specifically authorized by statute, principally Tex. Civ. Prac. & Rem. Code § 51.014. Authorized categories include orders on class certification, special appearance, temporary injunction, summary judgment in certain contexts, and (since September 2024) certain Texas Business Court orders. Permissive interlocutory appeals under § 51.014(d) require trial-court certification and discretionary acceptance by the court of appeals. An interlocutory appeal is an appeal taken from an order that does not finally dispose of the case. Texas applies the "final-judgment rule", appeals are generally available only from final judgments or final orders disposing of all parties and claims. Interlocutory appeals are the statutory exception, available only where specifically authorized. The principal authorization is Section 51.014 of the Civil Practice and Remedies Code. The launch of the Texas Business Court (effective September 1, 2024) introduced new interlocutory appeal pathways for business-court matters. Authority Principal interlocutory appeal statute: Tex. Civ. Prac. & Rem. Code § 51.014 (appeal of interlocutory order). Mandamus alternative: see Mandamus . Texas Business Court appeals: Tex. Gov't Code Ch. 25A ; Tex. Civ. Prac. & Rem. Code § 51.016 (Business Court interlocutory appeals to Fifteenth Court of Appeals). Texas Citizens Participation Act: Tex. Civ. Prac. & Rem. Code § 27.008 (denial of TCPA dismissal motion immediately appealable). Permissive interlocutory appeal: § 51.014(d) (controlling question of law, materially advances ultimate termination). Appellate procedure: Tex. R. App. P. 28 (accelerated appeals). Mandatory interlocutory appeal categories, § 51.014(a) Section 51.014(a) authorizes appeal as of right from orders that: (1) appoint or refuse to appoint a receiver or trustee ; (2) overrule or grant a motion to vacate or appoint a receiver ; (3) certify or refuse to certify a class ; (4) grant or refuse a temporary injunction ; (5) deny a motion for summary judgment based on a claim against or defense by a media defendant in a libel suit ; (6) deny a motion to dismiss filed under § 27 (TCPA, anti-SLAPP) ; (7) grant or deny a plea to the jurisdiction by a governmental unit ; (8) deny a motion for summary judgment based on official immunity by a public employee ; and several other narrow categories. Appeals under § 51.014(a) are accelerated under Tex. R. App. P. 28; the court of appeals must accept jurisdiction. Permissive interlocutory appeal, § 51.014(d) Section 51.014(d) authorizes permissive interlocutory appeal of any order that meets two requirements: (1) the order involves a controlling question of law as to which there is substantial ground for difference of opinion; and (2) immediate appeal may materially advance the ultimate termination of the litigation. Both the trial court (by certification) and the court of appeals (by discretionary acceptance) must approve the permissive appeal. The mechanism is most useful for case-dispositive legal questions, choice of law, statutory construction, scope of a privilege, that would otherwise require trial and final judgment to surface for appellate review. Texas Business Court interlocutory appeals (post-September 2024) The Texas Business Court ( Tex. Gov't Code Ch. 25A , effective September 1, 2024, with 2025 modifications under HB 40) has its own interlocutory appeal pathways. Section 51.016 channels Business Court interlocutory appeals to the Fifteenth Court of Appeals (a new appellate court created concurrently with the Business Court, sitting in Austin). Business Court interlocutory appeals proceed on accelerated schedules similar to other § 51.014 appeals. The Fifteenth Court's specialization in business-court matters is intended to develop a coherent body of business-court appellate law. Mandamus as alternative Where interlocutory appeal is not statutorily authorized, mandamus is the principal alternative for obtaining immediate appellate review of a trial court order. Under In re Prudential Ins. Co. of America , 148 S.W.3d 124 (Tex. 2004), mandamus requires (1) abuse of discretion by the trial court and (2) lack of an adequate remedy by appeal. The choice between interlocutory appeal and mandamus depends on whether the order falls within § 51.014's enumerated categories, if yes, interlocutory appeal is the proper vehicle; if no, mandamus must be considered. Procedural mechanics Interlocutory appeals are accelerated: notice of appeal due 20 days after the order rather than the standard 30 days; record and briefing on accelerated schedules; oral argument typically expedited or waived. The trial court generally lacks plenary jurisdiction over the appealed order during the pendency of the appeal. Some § 51.014 categories also automatically stay trial court proceedings (e.g., TCPA appeals); others do not, leaving the case to proceed in the trial court even as the interlocutory appeal proceeds. Practical context For Texas commercial litigants, interlocutory appeal can be a critical case-shape lever, particularly in TCPA dismissals, class certifications, and temporary-injunction matters where the trial-court ruling has immediate material consequence. Best practice: (1) confirm the order falls within a § 51.014 category before relying on interlocutory appeal; (2) calendar the 20-day deadline immediately upon ruling, accelerated schedules leave no margin; (3) for permissive appeals under § 51.014(d), prepare the trial-court certification motion contemporaneously with the underlying order; (4) consider mandamus where § 51.014 doesn't apply but appellate review is essential; (5) for Business Court matters post-September 2024, route to the Fifteenth Court of Appeals. Related Terms Mandamus · Texas Business Court · Summary Judgment · Injunctive Relief · Supersedeas Bond IP Assignment § A written instrument transferring all right, title, and interest in identified intellectual property from the assignor to the assignee. Distinct from a license, which merely grants permission to use. Generally must be in writing, signed, and (for federal IP) recorded with the relevant agency. An IP assignment is a written instrument transferring all right, title, and interest in identified intellectual property from the assignor to the assignee. An assignment differs fundamentally from a license: a license grants permission to use the IP while ownership remains with the licensor; an assignment transfers ownership outright. Most categories of IP require a written, signed assignment for the transfer to be effective. Authority Copyright assignments: 17 U.S.C. § 204(a) (writing requirement). Patent assignments: 35 U.S.C. § 261 (writing requirement; recordation with USPTO). Trademark assignments: 15 U.S.C. § 1060 (Lanham Act assignments must be in writing and may be recorded with USPTO; trademark cannot be assigned in gross without the associated goodwill). Trade secret assignments: Tex. Civ. Prac. & Rem. Code Ch. 134A and general Texas contract law. Texas Statute of Frauds: Tex. Bus. & Com. Code § 26.01 . Writing requirement Federal IP statutes uniformly require a writing signed by the assignor for the assignment to be effective. Oral or email-only IP assignments are typically void. Best practice is a single instrument that (1) identifies the IP with reasonable specificity; (2) recites consideration; (3) uses present-tense transfer language ("Assignor hereby assigns, transfers, and conveys", not future-tense "will assign"); (4) includes representations as to ownership and lack of encumbrances; and (5) is signed by both parties. Present-tense vs. future-tense language Federal Circuit case law ( Filmtec Corp. v. Allied-Signal, Inc. , 939 F.2d 1568 (Fed. Cir. 1991)) holds that future-tense assignment language ("Employee will assign") creates only a contractual promise to assign in the future, not an immediate transfer of title. Present-tense language ("Employee hereby assigns") effects an immediate transfer. This distinction has been outcome-determinative in patent cases involving employee invention assignments and is best practice across all IP categories. Recordation Patent assignments should be recorded with the USPTO within three months of execution under 35 U.S.C. § 261 ; unrecorded assignments are void against subsequent bona fide purchasers without notice. Trademark assignments may be recorded with the USPTO under 15 U.S.C. § 1060 with similar protective effect. Copyright assignments may be recorded with the U.S. Copyright Office to establish priority over conflicting transfers and to provide constructive notice. Trademark assignment in gross A trademark assignment is invalid as an "assignment in gross" if it transfers the mark without the goodwill of the business with which the mark is used. Texas courts and federal courts both apply this rule strictly. The assignment instrument should explicitly recite that goodwill is conveyed with the mark. Practical context Texas businesses face IP assignment issues most frequently in (1) employee onboarding (invention assignment provisions in employment agreements); (2) contractor agreements (work-for-hire plus express assignment as a backstop); (3) M&A transactions (assignment of all IP from target to buyer); and (4) financing transactions (security interests in IP, perfected by USPTO/Copyright Office recordation in addition to UCC-1 filing). Failure to obtain proper written assignment from a contractor leaves the contractor as the legal owner of the work product, regardless of who paid for it. Related Terms License Agreement · Work-for-Hire Doctrine · Copyright · Trademark · Patent · Trade Secret J JNOV (Judgment Notwithstanding the Verdict) § A post-verdict motion asking the trial court to enter judgment for the moving party despite an adverse jury verdict, on the ground that the verdict is unsupported by legally sufficient evidence. Governed by Tex. R. Civ. P. 301. The Texas legal-sufficiency standard requires evidence rising to a level that would enable reasonable and fair-minded people to differ; mere conjecture or speculation does not. City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005), is the foundational case. A judgment notwithstanding the verdict (JNOV) is a post-verdict motion asking the trial court to disregard the jury's verdict and enter judgment for the moving party on the ground that the verdict is unsupported by legally sufficient evidence. JNOV is the procedural mechanism for raising no-evidence challenges after the case has gone to the jury, distinct from a directed verdict (which raises the same legal-sufficiency challenge before submission). The Texas standard for legal sufficiency is articulated in City of Keller v. Wilson , 168 S.W.3d 802 (Tex. 2005). Authority JNOV procedure: Tex. R. Civ. P. 301 (judgment shall conform to pleadings, evidence, and verdict; court may render judgment notwithstanding the verdict if directed verdict would have been proper or disregard answer to a question if there is no evidence to support the answer). Directed verdict: Tex. R. Civ. P. 268 . Legal-sufficiency standard: City of Keller v. Wilson , 168 S.W.3d 802 (Tex. 2005); Crosstex North Texas Pipeline, L.P. v. Gardiner , 505 S.W.3d 580 (Tex. 2016). Procedural prerequisite (must be raised below to preserve): St. Joseph Hosp. v. Wolff , 94 S.W.3d 513 (Tex. 2002). Appellate review on legal sufficiency: Dow Chem. Co. v. Francis , 46 S.W.3d 237 (Tex. 2001). The legal-sufficiency standard City of Keller v. Wilson , 168 S.W.3d 802 (Tex. 2005), is the foundational modern Texas case on legal sufficiency. The Texas Supreme Court rejected a "scintilla of evidence" formulation and adopted a more demanding standard: evidence is legally sufficient when it would enable reasonable and fair-minded people to reach the verdict under review. Conversely, the evidence is legally insufficient when (a) there is a complete absence of evidence of a vital fact; (b) the court is barred by rules of law or evidence from giving weight to the only evidence offered to prove a vital fact; (c) the evidence offered to prove a vital fact is no more than a scintilla; or (d) the evidence conclusively establishes the opposite of a vital fact. Categorical disregard of evidence Under Keller , an appellate court reviewing legal sufficiency must view the evidence in the light most favorable to the verdict, but must disregard evidence that reasonable jurors could not credit, including: (1) evidence the jury was instructed to disregard; (2) "incredible" evidence that no reasonable juror would credit; (3) evidence inconsistent with undisputed facts. Conjecture, speculation, and uncorroborated suspicion are not "evidence" for legal-sufficiency purposes, they don't rise to the level required. Procedural prerequisites JNOV must be preceded by a properly preserved no-evidence motion in the trial court, typically a motion for directed verdict made at the close of the opposing party's case (and renewed at the close of all evidence). Failure to move for directed verdict on legal-sufficiency grounds waives the right to challenge legal sufficiency through JNOV (and on appeal). Texas appellate courts strictly enforce this preservation requirement: St. Joseph Hosp. v. Wolff , 94 S.W.3d 513 (Tex. 2002), and progeny require specific objections at the trial-court level to support no-evidence challenges later. Disregarding individual jury answers Rule 301 also authorizes the trial court to disregard individual jury answers (rather than the entire verdict) where there is no evidence to support a particular answer. This partial JNOV mechanism is useful when a jury verdict is generally supported but contains specific unsupported findings, typically on damages amounts that exceed the evidentiary record. The trial court may enter judgment for the supported portions of the verdict while disregarding the unsupported answer. Distinction from new trial JNOV (legal insufficiency) is distinct from new-trial relief on factual-sufficiency grounds. Legal insufficiency : the evidence fails to rise to the level supporting the verdict, court enters judgment for the opposing party. Factual insufficiency : the evidence is sufficient to support the verdict but the verdict is so against the great weight and preponderance of the evidence that it is manifestly unjust, court grants new trial. Different standards, different remedies, different appellate review. Practical context For Texas commercial litigants, JNOV is the principal post-verdict mechanism for challenging an adverse jury outcome on the law. Best practice for defendants: (1) raise no-evidence challenges via directed verdict at the close of plaintiff's case, with specific reference to each element lacking evidence; (2) renew at the close of all evidence; (3) prepare comprehensive JNOV motion within the post-verdict deadline; (4) preserve all challenges for appeal. For plaintiffs facing JNOV motion: (1) marshal the evidence supporting each challenged element; (2) identify the specific evidence that, viewed favorably, supports each finding; (3) be prepared to defend on appeal under Keller 's standard. The strategic value of JNOV is highest where the underlying claim has well-defined elements and the evidence on a specific element is genuinely thin. Related Terms Summary Judgment · Jury Charge · Daubert and Robinson Standards · Supersedeas Bond Judicial Dissolution § A court-ordered termination of a Texas business entity's existence. The Texas regime is bifurcated: corporations are subject to TBOC § 11.404 (rehabilitative receivership); LLCs and partnerships are subject to TBOC § 11.314, which is substantially broader. Judicial dissolution is a court-ordered termination of a Texas business entity's existence, requiring the entity to wind up its business and distribute remaining assets. The Texas regime is bifurcated: corporations are subject to TBOC § 11.404 (rehabilitative receivership, with conversion to liquidating receivership under § 11.405 ); LLCs and partnerships are subject to TBOC § 11.314 (involuntary winding up), which is substantially broader and more accessible than the corporate statute. Authority Tex. Bus. Orgs. Code Subchapter G of Chapter 11: § 11.301 (involuntary winding up of filing entity); § 11.314 (involuntary winding up of partnership or LLC); § 11.404 (appointment of rehabilitative receiver); § 11.405 (conversion to liquidating receivership); § 11.054 (court powers in judicial winding up). § 11.314, the LLC and partnership dissolution statute The most significant post- Ritchie development for closely-held businesses. A district court has jurisdiction to order winding up of a Texas LLC or partnership on application of an owner if the court determines: (1) the economic purpose of the entity is likely to be unreasonably frustrated (the economic purpose test ); (2) another owner has engaged in conduct that makes it not reasonably practicable to carry on the business with that owner (the owner conduct test ); or (3) it is not reasonably practicable to carry on the business in conformity with the governing documents (the reasonable practicability test ). § 11.314(1)–(3) . The 2017 amendments extended subsections (1) and (2) to LLCs (which previously could only invoke (3)). The reasonable practicability test The most frequently invoked. "Not reasonably practicable" does not require impossibility, it requires that managers and members are unable to pursue the entity's purposes in a reasonable, sensible, and feasible manner. Common applications: voting deadlock, persistent breach of the company agreement by controlling owners, irretrievable breakdown of trust, continuous defeat of the company's stated purpose. The economic purpose test Triggers winding-up jurisdiction where economic purpose is "likely" to be unreasonably frustrated. Future or threatened frustration suffices. Leading case: CBIF Ltd. P'ship v. TGI Fridays Inc. (Dallas Court of Appeals). The owner conduct test Focuses on the actions of a particular owner that make it not reasonably practicable to carry on the business with that owner. The closest TBOC analog to the pre- Ritchie common-law oppression doctrine and a principal post- Ritchie mechanism for oppressed minority members of Texas LLCs. § 11.404, corporate rehabilitative receivership Substantially narrower. A court may appoint a receiver only on (1) insolvency or imminent insolvency; (2) certain deadlock; (3) illegal, oppressive, or fraudulent conduct (subject to Ritchie 's four-element test); or (4) misapplication or waste. The court must additionally find that all other available remedies are inadequate. The remedy is appointment of a rehabilitative receiver, not dissolution and not a court-ordered buyout. § 11.405, conversion to liquidating receivership If a rehabilitative receivership remains in place for more than one year without resolution, the court may convert it to liquidating and ultimately order dissolution. The one-year wait and the lesser-remedies-must-be-inadequate requirement make this a slow path. Practical context § 11.314 is one of the most important and underused provisions in Texas closely-held business law. Because § 11.314 is not subject to Ritchie 's narrow oppression definition and applies to LLCs and partnerships regardless of the four-element corporate test, it provides oppressed minority members of Texas LLCs with substantially more leverage than minority shareholders of Texas corporations have under § 11.404 . The bifurcation between LLC and corporate dissolution remedies is one of the strongest reasons closely-held Texas businesses seeking the most owner-protective regime should consider LLC form rather than corporate form, all else being equal. Companion article: Business Divorces in Texas Related Terms Shareholder Oppression · Business Divorce · Derivative Action · Closely Held Corporation · Limited Liability Company · Corporation Jury Charge § The set of questions, definitions, and instructions submitted to the jury in a Texas civil case. Governed by Tex. R. Civ. P. 271-279. Texas favors broad-form submission, single questions encompassing all theories of liability, but Crown Life Insurance Co. v. Casteel, 22 S.W.3d 378 (Tex. 2000), restricts broad-form submission where the question commingles valid and invalid theories. The charge conference is the procedural moment at which charge issues must be preserved for appellate review. The jury charge is the set of questions, definitions, and instructions submitted to the jury in a Texas civil case. The charge frames what the jury decides; charge errors are among the most consequential reversible errors in civil practice. Texas favors broad-form submission, single questions encompassing all theories of liability supported by the evidence, but the Casteel doctrine restricts broad-form submission where the question commingles valid and invalid theories. Authority Texas jury charge framework: Tex. R. Civ. P. 271-279 . Form of submission: Rule 277 ("the court shall, whenever feasible, submit the cause upon broad-form questions"). Definitions and instructions: Rule 277, 278 . Objections and preservation: Rule 274 . Submission of separate issues: Rule 278 . Foundational broad-form-with-invalid-theory case: Crown Life Insurance Co. v. Casteel , 22 S.W.3d 378 (Tex. 2000). Granulated submission for elements of damages: Harris v. Archer , 134 S.W.3d 411 (Tex. App.-Amarillo 2004, pet. denied). Texas Pattern Jury Charges (PJC), published by the State Bar of Texas, are the principal charge templates used in commercial litigation. Broad-form submission Rule 277 directs trial courts to submit "broad-form questions" whenever feasible. The classic broad-form negligence question: "Did the negligence, if any, of [defendant] proximately cause the occurrence in question?", a single question encompassing duty, breach, causation, and (if relevant) multiple theories. Broad-form submission is generally faster, simpler for the jury, and less error-prone than granulated submission. Texas's preference for broad-form is consistent with general civil procedure trends but more emphatic than many states. The Casteel doctrine Crown Life Insurance Co. v. Casteel , 22 S.W.3d 378 (Tex. 2000), is the principal limitation on broad-form submission. Casteel held that broad-form submission is reversible error where the question commingles valid and invalid theories of liability, the jury's affirmative answer cannot be parsed to determine which theory it relied on, and remand is required. Application of Casteel : (1) where multiple theories are submitted broad-form and one theory is unsupported by evidence; (2) where one theory is invalid as a matter of law; (3) where the question conflates separate causes of action whose elements differ. Casteel error is preserved by specific objection at the charge conference, identifying the invalid theory. Definitions and instructions The charge includes not only questions but also definitions and instructions. Definitions explain key legal terms (e.g., "negligence means failure to use ordinary care"); instructions explain how to answer (e.g., "Do not consider sympathy or prejudice"). Definitions and instructions must be supported by the pleadings, evidence, and law; they may not comment on the weight of evidence or imply opinion on disputed facts (Rule 277). Texas Pattern Jury Charges provide standard definitions and instructions for most causes of action; deviations should be carefully justified. The charge conference The charge conference, the formal proceeding at which the trial court determines what to include in the charge, is the critical moment for preserving charge issues for appeal. Each party submits proposed questions, definitions, and instructions; the trial court rules on inclusions and exclusions; objections must be specific and on the record. Failure to object specifically waives the issue (Rule 274). The charge conference often follows the close of evidence and immediately precedes closing arguments, pacing is tight and preparation is essential. Damages submission Damages submission frequently uses granulated rather than broad-form questions, separating each element of damages (medical expenses, lost wages, pain and suffering, etc.). Granulated damages submission is justified when the elements have different supporting evidence and recovery limits, such that aggregating them in a single question would obscure the source of the verdict. Mental anguish, future damages, and exemplary damages typically receive separate questions. Common charge errors Recurring sources of charge error: (1) commingling theories , broad-form questions that include unsupported or invalid theories; (2) missing element , failure to include a necessary element of the cause of action; (3) improper definition , definitions that misstate the law or unfairly slant interpretation; (4) commenting on the evidence , instructions that imply judicial opinion on disputed facts; (5) missing instruction , failure to include a required limiting instruction; (6) burden allocation , placing the burden of proof on the wrong party. Practical context For Texas commercial litigants, the charge conference is the highest-leverage moment of trial after closing argument. A single misplaced question can result in reversal and retrial; conversely, a well-crafted broad-form question can lock in a favorable verdict against later attack. Best practice: (1) draft proposed charge well before trial, at minimum, by the time of the pretrial conference; (2) start from the Texas Pattern Jury Charges and adapt for case specifics; (3) raise Casteel issues if the opposing party seeks broad-form submission of theories that may be invalid; (4) make specific record objections at the charge conference; (5) prepare for the charge conference as carefully as for closing argument. Charge errors are the most frequent reversible errors in Texas appellate practice. Related Terms JNOV · Summary Judgment · Daubert and Robinson Standards · Expert Witness Disclosure L Letter of Credit § A formal undertaking by an issuer (typically a bank) to honor presentations made under specified terms, paying the beneficiary upon presentation of conforming documents. Two principal types: commercial letters of credit (payment in international and domestic sale of goods) and standby letters of credit (secondary payment guarantee for performance or payment obligations). Governed by Tex. Bus. & Com. Code Ch. 5 (UCC Article 5), often supplemented by UCP 600 or ISP98. A letter of credit is a formal undertaking by an issuer (typically a bank) to honor presentations made under specified terms, paying the beneficiary upon presentation of documents that conform to the credit's requirements. Letters of credit are foundational to international trade and significant in domestic commercial transactions. Two principal types: commercial letters of credit (used as payment mechanism in sale-of-goods transactions, particularly international trade) and standby letters of credit (used as secondary payment guarantee for performance or payment obligations). Texas law governs through UCC Article 5, often supplemented by international rules. Authority Texas UCC Article 5: Tex. Bus. & Com. Code Ch. 5 : § 5.102 (definitions); § 5.103 (scope); § 5.106 (issuance, amendment, cancellation); § 5.108 (issuer's rights and obligations); § 5.109 (fraud and forgery); § 5.111 (remedies); § 5.116 (choice of law and forum). International supplements: Uniform Customs and Practice for Documentary Credits (UCP 600), International Chamber of Commerce, effective July 1, 2007 (commercial credits); International Standby Practices 1998 (ISP98), ICC, effective Jan. 1, 1999 (standby credits). Choice of governing rules: § 5.116(c) . Three-party structure Every letter of credit involves three parties: (1) applicant , the party requesting issuance, typically a buyer or contract obligor; (2) issuer , the bank issuing the credit, undertaking the payment obligation; (3) beneficiary , the party entitled to draw on the credit, typically a seller or contract counterparty. Additional parties may include a confirming bank (adding its own undertaking to the issuer's), an advising bank (notifying the beneficiary of the credit's terms), or a nominated bank (authorized to honor or negotiate). The beneficiary's right to draw is independent of the underlying transaction between applicant and beneficiary. The independence principle The defining doctrine of letter-of-credit law is the independence principle : the issuer's obligation to honor a conforming presentation is independent of any underlying contract or dispute between the applicant and beneficiary. The issuer pays against documents, not goods or performance, if the beneficiary presents documents that conform to the credit's terms, the issuer must pay, even if the applicant claims that the underlying transaction has been breached. This principle makes letters of credit valuable as payment-certainty instruments. The principle has narrow exceptions for fraud and forgery under § 5.109. Strict compliance Issuer payment obligations are gated by strict compliance with the credit's terms, documents must conform precisely to the requirements stated in the credit. The strict-compliance doctrine produces results that may seem hyper-technical: a typographical discrepancy between the credit and the presentation can authorize dishonor. Texas courts apply strict compliance with reasonable practical limits, minor variations that do not affect the substance of the transaction may be excused. Issuers receive a reasonable time (not exceeding seven business days under § 5.108(b)) to examine presentations and elect to honor or dishonor. Commercial vs. standby distinction Commercial letters of credit are payment mechanisms, the seller draws against documents (bill of lading, commercial invoice, certificate of inspection) showing performance of the underlying sale, and the issuer pays. The credit is the buyer's primary payment commitment, replacing the seller's credit risk on the buyer. Standby letters of credit are payment guarantees, the beneficiary draws only if the applicant has failed to perform, presenting documents (typically a sworn statement) attesting to the failure. The standby is secondary and contingent, and is functionally similar to a guaranty but structured as an independent payment undertaking. UCP 600 and ISP98 Letters of credit frequently incorporate one of two international rule sets. UCP 600 (Uniform Customs and Practice for Documentary Credits) is the standard for commercial credits, particularly in international trade. ISP98 (International Standby Practices 1998) is the standard for standby credits. Both rule sets are private contract terms incorporated by reference; they supplement the governing UCC Article 5 framework but do not displace its provisions in case of conflict. Bankruptcy-remote feature A critical feature of standby letters of credit is bankruptcy-remoteness: a payment under a letter of credit is from the issuer's funds, not the applicant's. The automatic stay under 11 U.S.C. § 362 does not prevent draws on standby credits, and the payments are not preferences under § 547 . This makes standby letters of credit attractive as security for landlord lease obligations, surety-type performance bonds, and other commitments where the beneficiary wants insulation from the applicant's bankruptcy risk. Practical context For Texas businesses, letters of credit are encountered in (1) international trade, virtually mandatory for first-time transactions with overseas counterparties; (2) commercial leases, landlords often accept LOCs as security deposits, especially for credit-impaired tenants; (3) construction projects, performance and payment standby LOCs in lieu of surety bonds; (4) franchise and licensing arrangements; (5) regulatory and bonding requirements. Drafting precision matters intensely: ambiguous credit terms become litigation. Best practice is to use templates from issuing-bank counsel and have credit terms reviewed by counsel familiar with UCC Article 5 and the relevant international rules. Related Terms Guaranty Agreement · Promissory Note · Commercial Lease · Construction Contract Letter of Intent § A preliminary written document outlining the proposed terms of a transaction, purchase price, structure, key conditions, exclusivity, timeline, before parties negotiate definitive agreements. Typically the first formal step after parties identify a deal. A letter of intent (LOI), sometimes called a "term sheet" or "memorandum of understanding," is a preliminary written document outlining the proposed terms of a transaction, purchase price, structure, key conditions, exclusivity, and timeline, before the parties negotiate definitive agreements. LOIs are the conventional first formal step after parties identify a deal worth pursuing. Authority No statutory authority, LOIs are creatures of Texas contract law. Enforceability is governed by general contract principles, with particular attention to whether specific provisions are intended to be binding. Hybrid binding/non-binding structure Most M&A LOIs are deliberately structured as partly binding and partly non-binding. Typically binding: confidentiality, exclusivity / no-shop, expense allocation, governing law, and dispute resolution. Typically non-binding: purchase price, structure, indemnification, closing conditions, and other commercial terms. The LOI should expressly identify which provisions are binding and which are not. Texas enforceability Texas courts enforce binding LOI provisions like any other contract. The principal risk for parties seeking non-binding effect: ambiguous "agreement to agree" language that a court may interpret as a binding obligation to negotiate in good faith. Foreca, S.A. v. GRD Develop. Co. , 758 S.W.2d 744 (Tex. 1988). Clear "non-binding except as expressly stated" language at the front of the document is the standard protection. Exclusivity / no-shop The most consequential binding provision in most LOIs. A typical no-shop binds the seller for 30–90 days from LOI execution, prohibiting the seller from soliciting, negotiating with, or providing diligence to other potential buyers during the period. Buyers rely on no-shops to justify investment in due diligence and definitive-document negotiation. Practical context The LOI sets the negotiating frame for the entire transaction. Items left vague in the LOI are typically renegotiated downward against the buyer (or upward for the seller) in the definitive agreement. Sellers benefit from specifying as many commercial terms as possible in the LOI; buyers benefit from preserving optionality. Companion article: Selling Your Business in Texas Related Terms Due Diligence · Representations and Warranties · Closing Conditions · Asset Purchase · Stock Purchase License Agreement § A contract by which the owner of intellectual property (the licensor) grants another party (the licensee) permission to use the IP under specified terms, while ownership remains with the licensor. Structured by exclusivity, scope, territory, field of use, and royalty. A license agreement is a contract by which the owner of intellectual property (the licensor) grants another party (the licensee) permission to use the IP under specified terms, while ownership of the IP remains with the licensor. Licenses are the principal monetization mechanism for patents, copyrights, trademarks, trade secrets, and software. The economic and legal structure of a license is defined by five core dimensions: exclusivity, scope, territory, field of use, and consideration. Authority General Texas contract law, including Tex. Bus. & Com. Code Ch. 26 (Statute of Frauds). Patent licensing: 35 U.S.C. § 261 . Copyright licensing: 17 U.S.C. § 204(a) (exclusive licenses must be in writing; non-exclusive licenses may be oral or implied). Trademark licensing: 15 U.S.C. § 1055 , § 1127 (related-companies doctrine and quality-control requirement). UCC Article 2 may apply to certain software license transactions ( Tex. Bus. & Com. Code Ch. 2 ). Exclusivity Three exclusivity tiers: (1) exclusive , the licensee receives the right to use the IP to the exclusion of all others, including the licensor; (2) sole , the licensee and the licensor both retain rights, but no other licensees are permitted; (3) non-exclusive , the licensor may grant additional licenses to other parties. Exclusive licenses confer standing to sue for infringement in the licensee; sole and non-exclusive licenses do not. Scope, territory, and field of use The scope provision defines what the licensee may do with the IP, make, use, sell, distribute, sublicense, modify, prepare derivative works, etc. Each enumerated right is its own grant; rights not granted are reserved. Territorial limits restrict use to a specified geography. Field-of-use restrictions limit application to a defined market segment (e.g., "for diagnostic medical devices only"). Sublicense rights must be expressly granted; they are not implied. Trademark quality control A trademark license without adequate quality-control provisions risks "naked licensing," which can result in abandonment of the mark. The Lanham Act and Texas common law require the licensor to maintain meaningful control over the nature and quality of goods or services offered under the licensed mark. Standard practice includes brand standards, audit rights, sample-approval mechanisms, and termination for failure to comply. Royalty structures Common royalty structures include: (1) running royalty (percentage of net sales or per-unit); (2) lump-sum or paid-up royalty; (3) milestone royalty (event-triggered payments); (4) minimum annual royalty; and (5) hybrid structures combining several. See Royalty . Standard protective provisions Most commercial licenses include warranties of ownership and non-infringement (often with carve-outs); indemnification (often capped); termination for material breach with cure periods; survival of confidentiality and royalty-on-pipeline provisions; audit rights; and dispute resolution. Choice of law and forum selection clauses warrant particular attention given the federal subject-matter jurisdiction that often applies to IP disputes. Practical context License terms compound. A 5% royalty on $20M annual revenue is $1M; a 10% royalty is $2M. The royalty negotiation deserves the same care as the deal price in an acquisition. Founders licensing IP out should resist exclusive perpetual grants without robust performance milestones and termination triggers. Licensees should resist tying royalties to gross revenue rather than net (which excludes returns, discounts, and certain pass-through costs). Related Terms IP Assignment · Royalty · Software License Agreement · Trademark · Patent · Open-Source License Limitation of Liability Clause § A contractual provision limiting one or both parties' exposure for damages arising from the contract, typically capping liability at a stated dollar amount, excluding consequential or punitive damages, or both. Generally enforceable in Texas commercial contracts between sophisticated parties, subject to limitations including statutory restrictions (e.g., DTPA waiver bar), public-policy limits (gross negligence and intentional torts), and the express-negligence rule for liability for the indemnitee's own negligence. A limitation of liability clause is a contractual provision that limits one or both parties' exposure for damages arising from the contract. Common forms include (1) a dollar cap on aggregate liability (e.g., "Vendor's liability shall not exceed the fees paid in the prior 12 months"); (2) exclusion of categories of damages (e.g., "Neither party shall be liable for consequential, indirect, or punitive damages"); (3) limitation of remedies to specified types (e.g., "exclusive remedy is repair or replacement"). Generally enforceable in Texas commercial contracts between sophisticated parties, subject to several limitations. Authority General enforceability under Texas contract law. Cause-of-action-specific authority: Wagner & Brown, Ltd. v. Bradford Allen, Inc. , 2 S.W.3d 350 (Tex. 1999) (limitation clause enforceability against negligence claims); Crown Plumbing, Inc. v. Petrozak , 751 S.W.2d 936 (Tex. App. 1988). Express negligence rule applicable to contracts limiting liability for own negligence: Ethyl Corp. v. Daniel Constr. Co. , 725 S.W.2d 705 (Tex. 1987). Statutory restrictions: Tex. Bus. & Com. Code § 17.42 (DTPA waiver prohibition); Tex. Bus. & Com. Code § 2.719 (UCC limitation of remedies). Public policy limits: Smith v. Golden Triangle Raceway , 708 S.W.2d 574 (Tex. App. 1986) (no waiver of gross negligence or intentional torts). The general enforceability rule Texas commercial law generally enforces limitation of liability clauses between sophisticated parties dealing at arm's length. The rationale: parties are free to allocate risk by contract, and limitations of liability often reflect substantive bargained-for consideration (lower price in exchange for capped exposure). Limitations are particularly common in technology contracts (where vendor liability could exceed contract value many times over), professional services, manufacturing supply, and similar contexts. Three principal limitation forms Common limitation structures: (1) aggregate cap , total liability limited to a stated amount, often expressed as a multiple of fees paid (e.g., "12 months of fees" or "the contract price"); (2) per-incident cap , limit per occurrence or claim, with no aggregate; (3) excluded damages , categories of damages explicitly excluded, typically consequential (lost profits, lost revenue, business interruption), punitive, and special; (4) remedy limitation , exclusive remedies specified (repair, replacement, refund), excluding broader contract or tort remedies. Sophisticated contracts combine forms, both an aggregate cap AND consequential-damage exclusion. The express negligence rule application Limitation clauses that limit liability for the limited party's own negligence are subject to the express-negligence rule from Ethyl Corp. The clause must specifically state that it covers the party's own negligence, boilerplate "any and all liability" language is insufficient. The conspicuousness requirement under Dresser Industries also applies: bold, capitalized, or otherwise conspicuous treatment of the limitation language. Properly drafted limitation clauses use formatting (often ALL CAPS sentences) for the operative limitation language. Public policy limits, gross negligence and intentional torts Texas courts decline to enforce limitations covering gross negligence, willful misconduct, fraud, and intentional torts. The principle: parties cannot contract away exposure for grossly improper conduct or intentional wrongdoing as a matter of public policy. Most modern limitation clauses expressly exclude gross negligence and willful misconduct from the limitation, both to ensure enforceability of the limitation as to ordinary negligence and to clarify the parties' intent. Wholesale "limit liability for any and all conduct" provisions risk being void for public policy reasons. Statutory restrictions, the DTPA bar Section 17.42 of the Business and Commerce Code makes "any waiver" of consumer rights under the DTPA "contrary to public policy and unenforceable" except in narrowly defined circumstances. The DTPA waiver bar effectively limits the use of liability limitations in consumer transactions covered by the DTPA. The exceptions in § 17.42 (consumer not in disparate bargaining position, advised by counsel, knowing waiver) are narrow and rarely invoked. For business-to-consumer contracts, limitation clauses must respect the DTPA framework. UCC sale-of-goods context Section 2.719 of the Business and Commerce Code (Texas UCC Article 2) governs limitation of remedies in sale-of-goods contracts. The UCC permits limitations but with two important constraints: (1) limited remedies that "fail of their essential purpose" are void; and (2) limitations on consequential damages for personal injury in consumer goods are presumptively unconscionable. The "fail of essential purpose" doctrine applies where the limited remedy turns out to be inadequate (e.g., repair-or-replace fails because seller won't repair), courts then permit broader remedies despite the limitation. Drafting best practices Robust limitation of liability clauses include: (1) express scope , specifying that the limitation covers the party's own negligence; (2) conspicuous formatting , bold, ALL CAPS, or separate captioned section; (3) carve-outs , explicit exclusions for gross negligence, willful misconduct, indemnity obligations, IP infringement, breach of confidentiality, and similar items that should not be capped; (4) aggregate cap with reasonable amount , typically tied to fees paid, project value, or insurance coverage; (5) consequential-damages exclusion , clear statement excluding lost profits, lost data, business interruption; (6) survival , limitation survives termination/expiration of the contract. Practical context For Texas commercial parties, limitation of liability clauses are the principal mechanism for capping contract exposure. Best practice: (1) negotiate the cap amount carefully, fees-paid multiples should reflect realistic damage exposure; (2) carve out matters that should not be capped (indemnity, IP, confidentiality breach); (3) ensure express-negligence and conspicuousness compliance; (4) coordinate with insurance, insured matters are often excluded from the cap; (5) for service-provider contracts, consider mutual but asymmetric caps reflecting risk allocation; (6) for technology and SaaS contracts, address data-related damages explicitly. The single most common drafting failure: limiting liability through boilerplate but not addressing whether the limitation covers the limited party's own negligence, courts then reject the limitation as to negligence claims. Express-negligence compliance is the foundation of enforceability. Related Terms Indemnification (Contractual) · Liquidated Damages · Warranty · Deceptive Trade Practices Act · Material Adverse Change Limited Liability Company § 2025 A statutory business entity formed under TBOC Title 3 that combines limited liability for owners (members) with substantial flexibility in management, taxation, and internal governance. The default Texas business entity for new closely-held formations. A Texas LLC is a statutory business entity that combines limited liability for its owners (called "members") with substantial flexibility in management, taxation, and internal governance. The LLC is governed by a charter document filed with the Texas Secretary of State (the "certificate of formation") and an internal governance contract (the "company agreement"). Most closely-held Texas businesses formed since 2010 are LLCs. Authority Tex. Bus. Orgs. Code Title 3 (governing LLCs); Title 1 (general provisions). Chapter 101 contains the principal LLC operating provisions; Chapter 3 governs formation; Chapter 11 governs winding up and termination. § 101.001 (definitions); § 1.002 (general definitions). The two distinguishing features Limited liability. Under TBOC § 101.114 , a member or manager is not liable for the debts, obligations, or liabilities of the LLC, including those arising under judgment, decree, or court order. The LLC's creditors look to the LLC's assets, not the members' personal assets, except in narrow veil-piercing circumstances under § 21.223 (made applicable to LLCs through § 101.002 ). See Veil-Piercing. Pass-through taxation by default. A multi-member LLC is taxed as a partnership unless it elects otherwise; a single-member LLC is taxed as a "disregarded entity" (its activities are reported on the owner's tax return). The LLC may elect to be taxed as a C corporation or S corporation by filing IRS Forms 8832 or 2553. Member-managed vs. manager-managed Texas LLCs may be either member-managed (members directly manage the LLC) or manager-managed (designated managers, who may or may not be members, manage the LLC, with members exercising only the rights specifically reserved to them in the company agreement). The choice is made in the certificate of formation under § 3.010 . Contractual flexibility § 101.052(c) provides that, with limited exceptions specified in § 101.054 , virtually any provision of TBOC Title 3 or Title 1 applicable to LLCs may be waived or modified in the company agreement. As amended effective May 14, 2025, § 101.401 permits the company agreement to expand, restrict, or eliminate any duties (including fiduciary duties) and related liabilities. This makes the Texas LLC the most contractually flexible Texas business entity. Charging order exclusivity Under § 101.112 , the entry of a charging order against a member's interest is the exclusive remedy by which a judgment creditor may satisfy a judgment out of the member's interest. The creditor cannot foreclose on the membership interest, force its sale, or obtain dissolution. This exclusivity rule applies equally to single-member LLCs and multi-member LLCs, a significant Texas-distinctive feature. See Charging Order. Series LLC option Under Subchapter M of Chapter 101 ( §§ 101.601–101.622 ), a Texas LLC may form designated series within the LLC. Each series may have its own assets, members, managers, and limitation of liability, properly maintained, the assets of one series are protected from the creditors of another series. See Series LLC. Formation A Texas LLC is formed by filing a certificate of formation with the Texas Secretary of State (Form 205) accompanied by a $300 filing fee. § 4.151 . Effective June 1, 2022, § 101.0515 requires LLC filing instruments to be signed by an authorized officer, manager, or member. Foreign LLCs An LLC formed in another jurisdiction must register to transact business in Texas under TBOC Chapter 9. The internal affairs of a foreign LLC are governed by the law of the jurisdiction of formation; "transacting business" in Texas without registration triggers personal liability of agents and other consequences. Practical context The Texas LLC is the default modern Texas business entity. Its combination of limited liability, pass-through taxation, contractual flexibility, charging-order exclusivity, and (effective May 14, 2025) statutory authority to eliminate fiduciary duties through the company agreement makes it the most owner-friendly business entity available to Texas closely-held businesses. The contractual flexibility is also its principal failure mode, a Texas LLC operating without a written, carefully-drafted company agreement is exposed to expensive disputes that the statute will resolve in ways no member would have wanted. Properly used, the Texas LLC is one of the strongest legal-entity choices in U.S. business law. Companion article: Starting a Business in Texas Related Terms Member · Manager · Company Agreement · Certificate of Formation · Membership Interest · Capital Contribution · Distribution · Series LLC · Charging Order · Texas Business Organizations Code Liquidated Damages § A contractual provision specifying the amount of damages payable on breach, fixed in advance by the parties' agreement. Replaces common-law actual-damages calculation with a predetermined amount, providing certainty and avoiding the cost of proving actual damages. A liquidated damages clause is a contractual provision specifying the amount of damages payable on breach, fixed in advance by the parties' agreement. Liquidated damages clauses replace common-law actual-damages calculation with a predetermined amount, providing certainty and avoiding the cost and difficulty of proving actual damages. Authority Texas common law. Phillips v. Phillips , 820 S.W.2d 785 (Tex. 1991) (two-part validity test). UCC sales contracts: Tex. Bus. & Com. Code § 2.718 . Validity test (Phillips two-part test) A liquidated damages clause is enforceable in Texas only if (1) the harm caused by the breach is incapable or difficult of estimation at the time of contract; and (2) the amount of liquidated damages is a reasonable forecast of just compensation. If either prong fails, the clause is an unenforceable "penalty" rather than valid liquidated damages. Distinction from penalty Texas courts disfavor penalty clauses, provisions designed to punish breach rather than compensate the non-breaching party. Excessive amounts disproportionate to anticipated harm, or lump-sum amounts triggered by any breach regardless of materiality, are commonly held unenforceable as penalties. UCC sales (§ 2.718) UCC Article 2 codifies the common-law approach: liquidated damages must be reasonable in light of (1) the anticipated or actual harm caused by the breach; (2) the difficulties of proof of loss; and (3) the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. Unreasonably large amounts are void as a penalty. Practical context Liquidated damages provisions are common in construction contracts (delay damages), real estate (earnest money), employment (training repayment), and intellectual property licenses. Drafting failures involve setting amounts that bear no realistic relationship to anticipated harm. Sophisticated drafting includes brief recitations of the parties' difficulty estimating actual damages and the reasonableness of the liquidated amount. Companion article: Contract Disputes in Texas Related Terms Sale of Goods · Statute of Frauds Lis Pendens § A recorded notice that litigation is pending concerning specific real property, providing constructive notice to subsequent purchasers and lenders of the dispute. Permitted only in actions involving title to property, establishment of an interest in property, or enforcement of a lien on property. Subject to expungement on motion if the underlying claim lacks evidentiary support. A lis pendens (Latin: "litigation pending") is a recorded notice that litigation is pending concerning specific real property. Once recorded with the county clerk, it provides constructive notice to subsequent purchasers, lenders, and other parties dealing with the property. The practical effect is to "cloud" title until the underlying litigation is resolved, buyers and lenders typically refuse to close on property subject to a pending lis pendens, since they would take subject to whatever judgment ultimately issues. Authority Texas lis pendens framework: Tex. Prop. Code §§ 12.007-12.0071 . Filing requirements: § 12.007 (notice form, recording, qualifying actions). Cancellation/expungement procedures: § 12.0071 (motion to expunge; evidentiary standard). General venue and effect of recorded instruments: Tex. Prop. Code § 13.002 . Protection of bona fide purchasers without notice: Tex. Prop. Code § 13.001 . When a lis pendens may be filed Section 12.007 limits lis pendens filings to three categories of actions: (1) actions involving title to real property; (2) actions to establish an interest in real property; and (3) actions to enforce an encumbrance against real property. A lis pendens filed in connection with an action that does not fall within these categories, for example, a pure money-damages contract dispute that incidentally references a property, is improper and subject to expungement. Required content and recording The lis pendens must include: (1) a statement that an action is pending; (2) the style of the action and the court in which it is filed; (3) the cause number; (4) the names of all parties; (5) a description of the property affected; and (6) the kind of action with the relief sought. The notice is recorded with the county clerk in the county where the property is located. There is no filing fee at the courthouse for recording, though minimal recording costs apply at the county clerk. Cancellation and expungement Section 12.0071, added by the Legislature to address abusive lis pendens filings, allows a property owner to file a motion to expunge the notice on grounds that (a) the underlying pleading does not contain a real property claim of the type permitted under § 12.007; or (b) the claimant fails to establish by a preponderance of the evidence the probable validity of the real property claim. If the court grants the motion, the lis pendens is canceled and the cancellation is recorded. Effect on transactions A pending lis pendens generally precludes commercially financeable real estate transactions, title insurers will not issue policies without exception, and lenders will not fund loans subject to the unknown outcome of litigation. As a practical matter, the lis pendens functions as injunctive relief without the procedural protections of an injunction. This makes the expungement remedy under § 12.0071 critically important when the underlying claim is weak or improperly framed. Improper filing risks Filing an improper lis pendens, particularly one that does not fall within § 12.007's enumerated categories, exposes the filer to claims for slander of title, tortious interference, malicious prosecution, and attorney's fees on expungement. Texas courts have awarded substantial damages where lis pendens were filed strategically to interfere with closing of unrelated transactions. Practical context For Texas commercial real estate buyers and sellers, a lis pendens discovered during title commitment review is one of the most common pre-closing crises. The buyer's first response should be (1) understand the underlying action and assess its merit; (2) determine whether the action falls within § 12.007 categories; (3) if not, consider expungement motion; (4) if so, evaluate negotiating around the issue (escrow, indemnity, postponement) or terminating the contract. Sellers facing a lis pendens should consider proactive expungement filing if the underlying claim is weak. Related Terms Title Insurance · Commercial Real Estate Purchase Agreement · Mechanic's and Materialman's Lien · Injunctive Relief · Deed M Manager § A person designated in a Texas LLC's certificate of formation or company agreement to manage the business and affairs of the LLC. Managers exist only in manager-managed LLCs and need not be members. A manager is a person designated in a Texas LLC's certificate of formation or company agreement to manage the business and affairs of the LLC. Managers exist only in manager-managed LLCs (LLCs whose certificate of formation states that the LLC will have managers under § 3.010(3) ). Managers need not be members; an LLC may designate non-member managers, member managers, or any combination. Authority Tex. Bus. Orgs. Code § 1.002(54) (defining "manager"); § 3.010(3) (designation in certificate); § 101.301 (governing authority); § 101.302 (number of managers); § 101.303 (qualifications); § 101.304 (term of office); § 101.305 (meetings); § 101.306 (vacancies); § 101.307 (action without meeting); § 101.308 (delegation); § 101.401 (modification of duties). Member-managed vs. manager-managed Texas LLCs are either member-managed or manager-managed. The default under § 101.251 , applicable when the certificate of formation does not specify, is that the LLC's affairs are managed by its members. Designation as manager-managed must be made in the certificate of formation under § 3.010(3) ; absent such designation, the LLC is member-managed regardless of what the company agreement says. Manager authority In a manager-managed LLC, the managers have the authority to manage the LLC's business and affairs. Members in such LLCs have only the rights specifically reserved to them by the company agreement and the TBOC, typically including the right to elect and remove managers, to approve fundamental transactions, and to vote on certain enumerated matters. §§ 101.355–101.356 . Manager liability and fiduciary duties Managers are not personally liable for the LLC's obligations solely by reason of being managers. § 101.114 . Managers owe fiduciary duties to the LLC, although the precise scope of those duties is one of the more contested areas of Texas LLC law. The default fiduciary-duty regime can be expanded, restricted, or, effective May 14, 2025, eliminated through the company agreement under § 101.401 . Authority to bind the LLC In a manager-managed LLC, each manager is an agent of the LLC for the purpose of its business. § 101.254 . Acts of a manager (including the execution of any instrument in the LLC's name) bind the LLC if the act apparently carries on in the usual way the business of the LLC, unless (a) the manager has no actual authority for the specific act and (b) the person with whom the manager is dealing has knowledge of the lack of authority. Practical context The choice between member-managed and manager-managed structure is one of the foundational Texas LLC formation decisions. Member-managed LLCs work well for small operating businesses where all members are actively involved in management. Manager-managed LLCs work better for LLCs with passive investor-members (real estate LLCs, family LLCs, investment vehicles), where centralizing management authority in one or more managers simplifies governance. The certificate of formation must affirmatively designate the LLC as manager-managed; this is a frequent drafting oversight, and the consequences of failing to make the designation when intended can be significant for member liability and authority to bind the LLC. Companion article: Starting a Business in Texas Related Terms Limited Liability Company · Member · Certificate of Formation · Company Agreement · Fiduciary Duty Mandamus § An extraordinary writ by which an appellate court compels a lower court or other government official to perform a non-discretionary duty. In Texas civil practice, mandamus is the principal vehicle for obtaining immediate appellate review of a trial-court order that is not subject to interlocutory appeal. Under In re Prudential Ins. Co. of America, 148 S.W.3d 124 (Tex. 2004), mandamus requires (1) abuse of discretion by the trial court and (2) lack of an adequate remedy by appeal. Mandamus is an extraordinary writ by which an appellate court compels a lower court or other government official to perform a non-discretionary duty (or, increasingly in Texas civil practice, to correct an abuse of discretion). In Texas civil practice, mandamus is the principal vehicle for obtaining immediate appellate review of a trial-court order that is not subject to interlocutory appeal under § 51.014. The modern Texas mandamus standard is articulated in In re Prudential Ins. Co. of America , 148 S.W.3d 124 (Tex. 2004). Authority Modern Texas mandamus framework: In re Prudential Ins. Co. of America , 148 S.W.3d 124, 135-36 (Tex. 2004) (orig. proceeding); Walker v. Packer , 827 S.W.2d 833, 840 (Tex. 1992). Procedural framework: Tex. R. App. P. 52 (original proceedings). Constitutional foundation: Tex. Const. art. V, § 3 (Supreme Court mandamus jurisdiction); art. V, § 6 (courts of appeals). Recent applications: In re State Farm Mut. Auto. Ins. Co. , 629 S.W.3d 866 (Tex. 2021); In re K&L Auto Crushers, LLC , 627 S.W.3d 239 (Tex. 2021). Federal counterpart: 28 U.S.C. § 1651 (All Writs Act). The two-prong Prudential standard In re Prudential Ins. Co. of America , 148 S.W.3d 124 (Tex. 2004), established the modern Texas mandamus framework: the relator (the party seeking the writ) must establish (1) abuse of discretion , the trial court clearly abused its discretion; and (2) lack of an adequate remedy by appeal , there is no adequate remedy through ordinary appellate review. The two prongs are not independent in practice, the adequacy analysis depends on the same circumstances that drive the abuse-of-discretion analysis. Abuse of discretion A trial court abuses its discretion when it acts without reference to guiding rules or principles, in an arbitrary or unreasonable manner, or in clear violation of the law. In re Prudential emphasizes that mere error is not enough, the abuse must be clear and the legal standard well-established. A trial court abuses its discretion when it (a) fails to analyze or apply the law correctly; (b) misinterprets or misapplies a clear statutory provision; (c) imposes an obligation not authorized by law; or (d) ignores a statute or controlling case law. Application of legal standards to facts is reviewed for clear error; pure questions of law are reviewed without deference. The "adequate remedy by appeal" prong The Walker v. Packer / Prudential analysis of "adequate remedy by appeal" is the prong where the most jurisprudential development has occurred. Under In re Prudential , "an appellate remedy is 'adequate' when any benefits to mandamus review are outweighed by the detriments." When the benefits outweigh the detriments, mandamus is appropriate. Factors: (1) preservation of important substantive and procedural rights; (2) judicial economy and avoidance of fatally flawed proceedings; (3) ability to give needed and helpful direction to the law that would otherwise be elusive in appeals from final judgments; (4) appellate-court resource considerations. In re Prudential rejected the prior more-rigid Walker formulation in favor of a balancing approach. Common mandamus categories Recurring categories where Texas appellate courts grant mandamus relief: (1) improperly denied special appearance , challenges to personal jurisdiction; (2) discovery orders , compelling disclosure of privileged materials, denying protective orders, or imposing excessive scope; (3) venue orders , improperly denied venue motion; (4) arbitration orders , improperly compelling or refusing to compel arbitration; (5) denial of jury waiver , enforcing contractual jury waiver; (6) wrongful disqualification , improperly disqualifying counsel; (7) denial of plea in abatement , dominant jurisdiction issues; (8) scheduling-order overreach , orders that effectively force trial in invalid posture. Procedural mechanics Mandamus proceedings are original proceedings in the appellate court, not appeals from the trial-court order. The relator files a petition with appendix in the court of appeals (or directly in the Texas Supreme Court for issues within original jurisdiction). The court may request a response from the real-party-in-interest and the trial court (the latter as a respondent). The standard of review is the Prudential two-prong test. Mandamus is granted "conditionally", the appellate court grants the petition and directs the trial court to take or undo specified action; the writ issues only if the trial court fails to comply. Mandamus vs. interlocutory appeal The choice between mandamus and interlocutory appeal depends on whether the underlying order falls within § 51.014's enumerated categories. If yes, interlocutory appeal is the proper vehicle and mandamus is generally unavailable. If no, mandamus is the principal alternative, though with the higher abuse-of-discretion + no-adequate-remedy threshold. Some categories overlap; the relator should identify the proper vehicle at the outset, since procedural missteps (e.g., filing a petition for permissive interlocutory appeal in a category authorizing only mandamus) waste time and may leave the underlying issue unreviewed. Practical context For Texas commercial litigants, mandamus is among the most strategically important tools in the appellate toolkit, but also one of the most demanding. The Prudential standard is high; appellate courts deny mandamus far more often than they grant. Best practice: (1) confirm the order is not subject to interlocutory appeal before resorting to mandamus; (2) identify the specific abuse of discretion with reference to controlling case law; (3) develop the no-adequate-remedy analysis by reference to specific harm that ordinary appeal cannot remedy (cost, delay, irreversibility, undermining of important rights); (4) act quickly, laches doctrine applies, and delays of weeks can be fatal; (5) prepare a tight, well-organized petition that frames the issue as the appellate court would receive it. Mandamus practice rewards careful issue-spotting and clear writing more than aggressive advocacy. Related Terms Interlocutory Appeal · Summary Judgment · Texas Business Court · Expert Witness Disclosure Master Service Agreement § A framework contract under which parties agree on general terms governing multiple future service engagements, with specific engagements documented through individual Statements of Work (SOWs) that incorporate the MSA's terms. Foundational to ongoing vendor relationships. A Master Service Agreement (MSA) is a framework contract between two parties under which the parties agree on the general terms and conditions that will govern multiple future service engagements between them. Specific engagements are then documented through individual Statements of Work (SOWs), Work Orders, or Purchase Orders that incorporate the MSA's terms. MSAs are foundational to ongoing vendor relationships, professional services arrangements, and IT and consulting engagements. Authority Creature of contract, governed by Texas common law. UCC Article 2 may apply where the master agreement covers sales of goods rather than services (predominant-purpose test). Typical structure (1) Recitals identifying the parties and overall relationship; (2) governance terms, confidentiality, IP ownership, indemnification, limitation of liability, warranty, insurance, force majeure; (3) statement-of-work mechanism, how individual engagements are documented and what conflicts-resolution rule applies between MSA and SOW; (4) payment terms, billing, payment timing, expense reimbursement; (5) termination, for cause, for convenience, effects of termination; (6) dispute resolution and choice of law. MSA-vs-SOW conflict resolution Most MSAs specify how conflicts between the MSA and an SOW are resolved. The default Texas rule absent express provision is that the more specific document (typically the SOW) controls within its scope, but the MSA controls for governance terms not expressly modified. Common drafting issues (1) Scope creep, SOW work expanding beyond original scope without amendment; (2) IP ownership ambiguity, work product, pre-existing IP, derivative works; (3) limitation of liability inadequate to backstop the actual exposure; (4) MSA term vs. SOW term mismatch creating gaps in governance. Practical context MSAs are the standard structure for ongoing vendor relationships in technology, consulting, marketing services, professional services, and similar industries. The MSA's risk-allocation provisions (limitation of liability, indemnification, IP) often have far more impact on the relationship's economics than the SOW's pricing terms. Related Terms Statute of Frauds · Force Majeure · Indemnification (M&A) · Choice of Law / Choice of Forum Material Adverse Change (MAC) Clause § A contractual provision permitting one party (typically the buyer) to walk away from a transaction or refuse to close if specified categories of adverse events occur to the target business between signing and closing. Allocates signing-to-closing risk. A material adverse change (MAC) clause, sometimes called a "material adverse effect" or "MAE" clause, is a contractual provision permitting one party (typically the buyer) to walk away from a transaction or refuse to close if specified categories of adverse events occur to the target business between signing and closing. The MAC clause is the principal contractual mechanism for allocating signing-to-closing risk. Authority No statutory authority, MAC clauses are creatures of contract. Standard structure Most MAC clauses define "material adverse change" as a change, event, or development that has a material adverse effect on the target's business, operations, financial condition, or results of operations, taken as a whole . The definition is then qualified by extensive carve-outs. Standard carve-outs Excluded from MAC: (1) general economic, financial, or political conditions; (2) industry-wide conditions; (3) acts of war, terrorism, or pandemic; (4) changes in law or accounting principles; (5) actions taken at buyer's request or required by the agreement; (6) failure to meet projections (with the underlying cause potentially still constituting MAC). Some carve-outs include "disproportionate effect" qualifiers, the carve-out applies only to the extent the adverse event affects the target similarly to other industry participants. Texas case law Texas appellate courts have not produced as developed a body of MAC jurisprudence as Delaware. Texas courts generally follow Delaware reasoning when interpreting MAC clauses, with the Delaware Supreme Court's Akorn v. Fresenius decision (2018) establishing the modern standard: MAC requires a substantial threat to the target's overall earnings power over a commercially reasonable period measured in years, not quarters. Practical context Despite the prevalence of MAC clauses, successful invocations are rare. Buyers seeking to walk under a MAC face a high evidentiary burden, and Texas courts are skeptical of buyers using MAC clauses to escape transactions for other reasons. Practical use of MAC clauses is more often as renegotiation leverage than as a basis for termination. Companion article: Selling Your Business in Texas Related Terms Closing Conditions · Representations and Warranties · Letter of Intent · Disclosure Schedule Mechanic's and Materialman's Lien § 2022 A statutory lien securing payment for labor or materials furnished to improve real property. Texas recognizes both a constitutional lien (self-executing for those in direct contract with the owner) and a statutory lien under Tex. Prop. Code Ch. 53 (available to subcontractors, suppliers, and design professionals through specified notice and filing procedures). HB 2237 substantially reformed the framework for prime contracts entered after January 1, 2022. A mechanic's and materialman's (M&M) lien is a statutory or constitutional lien securing payment for labor or materials furnished to construct or improve real property. Texas recognizes two parallel forms: (1) the constitutional lien under Article XVI, Section 37 of the Texas Constitution, self-executing, available to those in direct contractual privity with the property owner; and (2) the statutory lien under Chapter 53 of the Texas Property Code, available to a broader class of claimants (subcontractors, suppliers, design professionals) through prescribed notice and lien-affidavit procedures. House Bill 2237 (effective January 1, 2022) substantially reformed the statutory framework. Authority Constitutional lien: Tex. Const. art. XVI, § 37 . Statutory lien framework: Tex. Prop. Code Ch. 53 . Key provisions: § 53.021 (persons entitled to lien, including post-HB 2237 expansion to design professionals); § 53.052 (filing of affidavit and deadlines); § 53.054 (contents of affidavit); § 53.055 (notice of filed affidavit); § 53.056 (derivative claimant notice to owner and original contractor); § 53.057 (retainage notice); § 53.101 (reserved funds); § 53.158 (deadline to foreclose, now one year). Statutory amendments: HB 2237, 87th Leg. (2021), eff. Jan. 1, 2022, applicable to original contracts entered on or after that date. Constitutional vs. statutory lien The constitutional lien is self-executing, it arises automatically upon performance of work or supply of materials by a person in direct contractual privity with the owner. No filing is required for the lien to exist between the parties, though recording is necessary to bind subsequent purchasers. The statutory lien requires affirmative compliance with the notice and lien-affidavit procedures of Chapter 53 but extends to a broader class of claimants, subcontractors and lower-tier parties not in privity with the owner. Filing deadlines (post-HB 2237) For original contracts entered on or after January 1, 2022, lien-affidavit filing deadlines under § 53.052 are: (1) original contractor on residential project , 15th day of the 3rd month after the month of completion, termination, or abandonment; (2) original contractor on non-residential project , 15th day of the 4th month after such month; (3) subcontractor on residential project , 15th day of the 3rd month after the month the claimant last provided labor or materials; (4) subcontractor on non-residential project , 15th day of the 4th month after such month; (5) retainage claim , 15th day of the 3rd month after the month the original contract was completed, terminated, or abandoned (with separate § 53.103 30-day deadline issues to navigate carefully). Notice requirements Subcontractors and lower-tier claimants must serve statutory notice on the owner and original contractor. Post-HB 2237, the second-month notice for second-tier subcontractors is eliminated; all derivative claimants now use the third-month notice deadline. The notice may be served by certified mail, in-person, or by other traceable private delivery with proof of receipt. Claims for retainage require a separate § 53.057 notice in addition to the lien affidavit. Foreclosure deadline (post-HB 2237) Under amended § 53.158, the deadline to file suit to foreclose a perfected statutory lien is one year from the last date the claimant could have filed the lien affidavit under § 53.052. The parties may agree to extend the deadline, but not beyond the second anniversary of the lien-filing deadline; the agreement must be in writing, made before the one-year deadline expires, and recorded with the county clerk. Original contractors retain longer enforcement windows for constitutional liens. Design-professional lien rights HB 2237 expanded § 53.021 to grant lien rights to architects, engineers, and surveyors who provide a design, drawing, plan, plat, survey, or specification, even without direct contractual privity with the owner. This was a significant change from prior law, which limited design-professional lien rights to those in direct contract with the owner. Practical context For Texas contractors, subcontractors, and suppliers, the M&M lien framework is the principal payment-protection tool on Texas construction projects. The 2022 reforms simplified some traps for the unwary (eliminating second-month notices, harmonizing retainage timing) but tightened others (one-year foreclosure deadline). The key compliance posture is (1) calendar all notice deadlines from project start; (2) document labor/material delivery monthly; (3) serve notices via certified mail with retained proof; (4) file lien affidavits promptly when payment is missed; (5) calendar foreclosure deadline; (6) consider lien releases at each pay application to demonstrate good faith and preserve relationships. Related Terms Construction Contract · Retainage · Texas Prompt Payment Act · Affidavit of Completion · Texas Construction Anti-Indemnity Act · Perfection Mediation § A non-binding, confidential dispute-resolution process in which a neutral third party facilitates negotiation between the parties to reach a voluntary settlement. The mediator does not decide the dispute, only the parties can resolve it. Texas courts routinely order mediation before trial. Mediation is a non-binding, confidential dispute-resolution process in which a neutral third party (the "mediator") facilitates negotiation between the parties to reach a voluntary settlement. The mediator does not decide the dispute, only the parties can resolve it. Texas courts routinely order mediation before trial in commercial cases. Authority Tex. Civ. Prac. & Rem. Code Ch. 154 (Alternative Dispute Resolution Procedures): § 154.023 (mediation defined); § 154.053 (confidentiality); § 154.073 (privilege and confidentiality of communications); Tex. R. Civ. P. (court-ordered ADR procedures). Court-ordered mediation Texas trial courts have broad authority to order parties to mediation under Ch. 154 . Refusal to attend a court-ordered mediation may result in sanctions. The court cannot, however, force parties to settle, only to participate in good faith. Confidentiality Communications during mediation are confidential and inadmissible in subsequent proceedings, with limited exceptions (criminal admissions, threats of violence, abuse). § 154.073 . The settlement agreement reached in mediation, however, becomes an enforceable contract once executed. Mediator selection Parties may agree on a mediator or have one appointed by the court. Many commercial mediators in Texas are former judges or experienced trial lawyers. Mediator fees are typically split equally between the parties unless otherwise agreed. Practical context Mediation resolves the substantial majority of cases that go through the process, Texas data suggests settlement rates above 70% for properly-prepared commercial mediations. The principal value is the confidential, low-stakes setting that allows parties to discuss settlement options without fear of disclosure in litigation. Companion article: Contract Disputes in Texas Related Terms Arbitration · Texas Business Court Member § An owner of a Texas LLC, the LLC equivalent of a shareholder of a corporation or partner of a partnership. Members hold "membership interests" representing economic rights and (in member-managed LLCs) governance rights. A member is an owner of a Texas LLC, the LLC equivalent of a shareholder of a corporation or a partner of a partnership. Members hold "membership interests" that represent economic rights (to share in profits and distributions) and, in member-managed LLCs, governance rights (to vote on LLC matters). The TBOC distinguishes between "members" and "assignees", an assignee receives the economic rights associated with a transferred membership interest but does not have governance rights unless admitted as a member under the procedure required by the company agreement. Authority Tex. Bus. Orgs. Code § 1.002(53) (defining "member"); § 101.101 (admission); § 101.102 (rights upon admission); § 101.103 (continuation of LLC); § 101.106 (rights in LLC property); § 101.107 (right to withdraw); § 101.108 (assignment of interest); § 101.114 (no personal liability); Subchapter G (meetings, voting); Subchapter L (derivative actions). Admission Under § 101.101 , a person becomes a member of a Texas LLC: (1) at the time the LLC is formed, if the person is named as an initial member in the certificate of formation, the company agreement, or a writing executed by the organizer or initial member; or (2) after formation, in the manner provided by the company agreement, or with the consent of all members if the company agreement is silent. No personal liability Under § 101.114 , a member is not liable for the debts, obligations, or liabilities of the LLC, including those arising under judgment, decree, or court order, except as expressly provided by statute. This is the principal feature distinguishing Texas LLC membership from general partnership. No right to withdraw The Texas default rule is that a member has no right to withdraw from a Texas LLC. § 101.107 . This is a substantial departure from many other state LLC statutes and from older Texas partnership law. A member who wishes to exit a Texas LLC must rely on (a) a contractual buy-out or withdrawal provision in the company agreement; (b) sale of the membership interest to a third party (subject to transfer restrictions in the company agreement); (c) judicial winding up under § 11.314 ; (d) derivative or direct claims for breach of fiduciary duty; or (e) negotiated exit with the consent of the LLC and the remaining members. Assignment of interest Under § 101.108 , a member may assign the member's interest in the LLC unless the company agreement provides otherwise. However, an assignee does not become a member unless admitted in accordance with the procedure required by the company agreement (or, if silent, with the consent of all other members). An assignee is entitled to the economic rights associated with the transferred interest, to receive distributions and allocations, but not to vote, inspect records, or otherwise participate in management. No vested property right Under § 101.106 , a member or assignee has no interest in any specific property of the LLC. The LLC's property is the LLC's; the member owns the membership interest, not the underlying assets. Information rights Under §§ 101.501–101.502 , a member has the right to inspect and copy specified LLC records on reasonable demand for any purpose reasonably related to the member's interest as a member. Practical context The combination of § 101.107 (no right to withdraw), § 101.108 (assignee receives only economic rights), and § 101.112 (charging order is exclusive creditor remedy) makes Texas LLC membership one of the most "locked-in" forms of business ownership in U.S. law. A Texas LLC member without a buy-sell provision in the company agreement, without a willing third-party buyer, and without grounds for judicial winding up under § 11.314 may have no practical exit at all. This is the principal reason careful drafting of the company agreement at formation is essential, particularly its exit, transfer, and buy-sell provisions. Companion article: Starting a Business in Texas Related Terms Limited Liability Company · Manager · Membership Interest · Company Agreement · Capital Contribution · Distribution · Charging Order Membership Interest § The ownership interest of a member in a Texas LLC, comprised of two analytically separate components: economic rights (rights to distributions and allocations) and governance rights (rights to vote, inspect records, and participate in management). A membership interest is the ownership interest of a member in a Texas LLC. The Texas Business Organizations Code treats the membership interest as comprising two analytically separate components: economic rights (the right to receive distributions and allocations of profit and loss) and governance rights (the right to vote on LLC matters, to inspect records, to participate in management in a member-managed LLC, and to exercise other rights specifically reserved to members). This distinction is fundamental to Texas LLC law. Authority Tex. Bus. Orgs. Code § 1.002(56) (defining "membership interest"); § 101.106 (membership interest as personal property); § 101.108 (assignment of membership interest); § 101.109 (effect of assignment); § 101.110 (rights of assignee); § 101.111 (rights of judgment creditor); § 101.112 (charging order); § 101.113 (death or other event affecting member). Personal property classification Under § 101.106(b) , a membership interest is personal property. A member or assignee does not have an interest in any specific property of the LLC. § 101.106(a) . This classification is significant for: (1) Estate planning. Membership interests pass under the member's will or by intestacy as personal property, not as real property even if the LLC's principal assets are real estate. (2) Asset protection. The membership interest is the asset reachable by the member's personal creditors; the LLC's underlying property is not. (3) Marital property. In Texas community-property analysis, the membership interest (rather than the LLC's underlying assets) is the property characterized as separate or community. (4) Tax basis. The member's tax basis is in the membership interest, not in the LLC's underlying assets (subject to specific Internal Revenue Code basis rules). The economic-rights / governance-rights split Under §§ 101.108–101.110 , a member may assign the economic rights associated with the membership interest without automatically transferring the governance rights. The transferee (called an "assignee") receives the right to share in the assigned distributions and allocations, but does not automatically become a member with voting and other governance rights. The assignee becomes a member only if (a) the company agreement provides for automatic admission, or (b) the other members consent to the admission as required by the company agreement. Charging-order limitation Under § 101.112 , a judgment creditor of a member who obtains a charging order receives only the economic rights, the right to receive distributions when made, but does not become a member, does not have governance rights, and cannot foreclose on the membership interest. This is the principal Texas-distinctive asset-protection feature for membership interests. See Charging Order. Transfer restrictions The TBOC's default transfer rules under §§ 101.108–101.110 are routinely modified by the company agreement. Common restrictions include rights of first refusal, mandatory buy-back provisions, transfer prohibitions, and admission-of-assignee restrictions. These are typically among the most important provisions of any Texas LLC company agreement because they determine the member's effective exit options. Death and other events affecting members Under § 101.113 , on a member's death, the member's personal representative may exercise the member's rights for the purpose of settling the deceased member's estate. The default does not give the personal representative full membership rights, only those necessary for estate administration. The company agreement may, and typically should, address this question explicitly. Practical context The economic-rights / governance-rights split is the conceptual foundation of Texas LLC asset protection. Properly understood, it explains why a creditor with a charging order has limited remedies, why an assignee of a membership interest is in a structurally weaker position than the original member, and why thoughtful company-agreement drafting around transfers, deaths, and divorces is essential. For Texas business owners contemplating succession planning, marital-property division, or asset-protection structures, the first analytical step is always the same: identify what the member owns (a personal-property interest comprising economic and governance rights, not the LLC's underlying assets), and then identify the rules and contractual restrictions that govern how each component of that interest may be transferred. Companion article: Raising Capital in Texas Related Terms Limited Liability Company · Member · Capital Contribution · Distribution · Charging Order · Company Agreement Merger § A TBOC-authorized transaction in which two or more entities combine, with one entity surviving and the others merging into the survivor. The surviving entity acquires all rights, property, debts, and liabilities of the merging entities by operation of law. A merger is a TBOC-authorized transaction in which two or more entities combine, with one entity surviving and the other entity (or entities) merging into the survivor. The surviving entity acquires all rights, title, property, debts, and liabilities of the merging entities by operation of law. Authority Tex. Bus. Orgs. Code Subchapter A of Chapter 10: §§ 10.001–10.010 (mergers and interest exchanges); §§ 10.151–10.156 (filing requirements). Approval requirements: § 21.452 (corporate mergers); § 21.457 (class voting on mergers). Plan of merger (§ 10.002) Must specify the names of the merging entities, the surviving entity, the manner of converting equity interests, the surviving entity's certificate of formation, and any other provisions required by the TBOC or the parties' governing documents. Approval requirements for corporations (§ 21.452) A merger involving a Texas corporation requires (1) board approval and (2) shareholder approval by the affirmative vote of two-thirds of outstanding voting shares, unless the certificate of formation provides for a lower threshold (which may be as low as a majority). Class voting (§ 21.457) Class voting on mergers is governed by § 21.457 , subject to the SB 29 waiver authority under § 21.364(d)(1) (eff. May 14, 2025) permitting Texas corporations to waive separate class voting in their certificates of formation. See Class Voting . Short-form mergers (§ 10.005) A parent corporation owning 90% or more of a subsidiary may merge the subsidiary into itself without subsidiary-shareholder approval. Effect of merger (§ 10.008) On the effective date: (1) the merging entity ceases to exist; (2) the surviving entity continues; (3) all property, rights, debts, and liabilities of the merging entity pass to the surviving entity by operation of law; (4) all proceedings continue against the surviving entity. Dissenters' rights Texas corporate shareholders have statutory dissenters' rights in certain mergers under §§ 10.351–10.368 , entitling dissenting shareholders to fair value for their shares. Practical context Mergers are the dominant Texas M&A structure for combinations of operating businesses where the buyer wants to acquire the entire business as a going concern with all assets and liabilities transferred by operation of law (rather than through individual asset transfers). Related Terms Corporation · Conversion · Voting · Class Voting / Series Voting · Shareholder · Asset Purchase · Stock Purchase · Reverse Merger Mezzanine Financing § Subordinated debt financing typically positioned between senior secured debt and equity in the capital stack. Bears higher interest rates than senior debt (often 12%-18%) plus equity-like features such as warrants, conversion rights, or PIK (paid-in-kind) interest. Subordinated to senior debt by intercreditor agreement and typically secured (if at all) by a second lien or pledge of equity in the operating company. Mezzanine financing is subordinated debt positioned between senior secured debt and equity in a borrower's capital stack. The "mezzanine" metaphor captures the layer's intermediate nature, neither pure debt nor pure equity, but combining features of both. Mezzanine financing typically bears higher interest rates than senior debt (12%-18% is a common range, though varies with credit quality and market conditions) plus equity-like features such as warrants, conversion rights, or paid-in-kind (PIK) interest that defers cash interest expense. Mezzanine is used to bridge the gap between senior debt capacity and equity availability, particularly in M&A and recapitalization transactions. Authority Mezzanine debt is a creature of private contract; no specific Texas statute governs the asset class. Subordination is governed by intercreditor agreements enforceable under Tex. Bus. & Com. Code § 9.339 and bankruptcy under 11 U.S.C. § 510(a) . Texas usury overlay applicable to mezzanine debt: Tex. Fin. Code §§ 302.001, 303.009 (18% commercial loan ceiling, with various exceptions and savings-clause practice). Warrants and equity features governed by securities laws including 15 U.S.C. § 77a et seq. (Securities Act of 1933) and Tex. Gov't Code Ch. 4001-4007 (Texas Securities Act). Capital structure positioning In a typical leveraged transaction capital stack: (1) senior secured debt at the top, bank revolver and term loan with first-priority liens on operating assets; (2) mezzanine debt below senior, subordinated, often unsecured or with second-lien on operating assets, sometimes with first-lien on holding-company equity; (3) preferred equity below mezzanine, non-debt instruments with seniority over common equity; (4) common equity at the bottom. Mezzanine bridges the gap when senior lenders cap leverage at, say, 3.0x EBITDA and total acquisition leverage requires 4.5x, the additional 1.5x comes through mezzanine. Equity kickers Mezzanine financings typically include equity-like return features beyond cash interest, often called "equity kickers." Common structures: (1) warrants , rights to purchase equity at a stated exercise price for a stated period, often 5-10% of fully diluted equity; (2) conversion rights , option to convert debt into equity at a stated conversion price; (3) preferred equity participation ; (4) contingent value rights tied to liquidity events. Equity kickers align the mezzanine lender's return with company performance and give the lender upside that pure debt could not capture. PIK interest Paid-in-kind (PIK) interest is interest that accrues to the principal balance rather than being paid in cash. Mezzanine debt often includes a PIK component (e.g., 12% cash + 4% PIK = 16% all-in) that defers cash outflow during the loan term. PIK interest helps the borrower preserve cash flow during a growth or integration phase but increases the absolute repayment obligation at maturity. Some mezzanine instruments are fully PIK ("PIK toggles") with full deferral of cash interest at the borrower's option for some period. Subordination structure Mezzanine debt is subordinated to senior debt by intercreditor agreement (see Intercreditor Agreement ). Typical subordination provisions: (1) payment subordination , mezzanine receives no cash payments during senior payment defaults; (2) lien subordination , if mezzanine has a second lien, it ranks behind senior in collateral proceeds; (3) enforcement standstill , mezzanine may not exercise remedies for a stated period after senior default notice; (4) turnover , mezzanine agrees to turn over to senior any payments received in violation of subordination. The intercreditor structure is typically heavily negotiated. Maturity and prepayment Mezzanine debt typically matures after senior debt, 6-8 years compared to senior maturity of 5-7 years. Prepayment is typically subject to a "make-whole" or "prepayment premium" structure: 3% in year 1, declining to 0% by year 4 or 5. This protects the mezzanine lender's expected yield against rapid refinancing. Mezzanine maturities are often "non-callable" for an initial period (typically 1-3 years), preventing the borrower from refinancing immediately even with prepayment premium. Texas usury considerations The 18% Texas commercial loan ceiling under § 303.009 creates drafting considerations for mezzanine deals approaching that rate. Standard practice: (1) careful definition of "interest" to exclude warrants and equity kickers (which are not "interest" if properly structured); (2) usury savings clauses providing that any interest exceeding the legal maximum is automatically reduced; (3) careful structuring of fees and prepayment premiums (some count as interest, some do not); (4) consideration of choice-of-law provisions selecting jurisdictions with higher usury ceilings or favorable mezzanine rules (Delaware, New York). Aggressive structures should be reviewed by counsel familiar with Texas usury doctrine. Practical context For Texas middle-market borrowers, mezzanine financing is a common option in (1) acquisition financing, bridging the senior-debt-to-purchase-price gap; (2) growth capital, funding expansion without dilutive equity issuance; (3) recapitalizations, funding owner buyouts or generational transitions; (4) refinancings, replacing maturing equity or stretched senior debt. The trade-off: mezzanine is more expensive than senior debt (often 12%-18% all-in vs. 8%-10% for senior) but cheaper than equity (which has no nominal cost but represents permanent dilution). Mezzanine is most attractive when the borrower has growth visibility supporting the higher cost and where dilution of existing equity is undesirable. Related Terms Promissory Note · Intercreditor Agreement · Guaranty Agreement · Covenant (Financial) · Usury · Shareholder Money Transmitter § 2025 A person or entity engaged in the business of receiving money from one party for transmission to another; subject to federal registration as a money services business and to state-by-state licensing. A money transmitter is a person or entity engaged in the business of receiving money or its monetary value (including virtual currency) for transmission to another person or location. Money transmitters include traditional remittance providers, prepaid card issuers, payment processors operating in certain capacities, peer-to-peer payment apps, and many cryptocurrency businesses. Money transmitters are regulated at both the federal and state level. Federally, money transmitters are a category of "money services business" (MSB) and must register with the Financial Crimes Enforcement Network (FinCEN) under the Bank Secrecy Act. The federal registration imposes anti-money-laundering compliance obligations including customer identification, transaction monitoring, and suspicious activity reporting. Most U.S. states (Montana being a notable exception) require money transmitters to obtain a state license. The licensing requirements vary substantially by state and typically include net worth, surety bond, financial reporting, and ongoing examination requirements. The Conference of State Bank Supervisors has worked to harmonize state licensing through the Money Transmitter Modernization Act, but state-by-state licensing remains the practical reality. Authority 31 U.S.C. § 5330 (federal MSB registration); 31 C.F.R. § 1010.100(ff)(5) (FinCEN definition); 31 C.F.R. § 1022 (BSA/AML compliance for MSBs). Texas requirements In Texas, money transmission is regulated by the Texas Department of Banking under the Texas Money Services Modernization Act, codified at Tex. Fin. Code Chapter 152 . Texas requires a money transmission license, surety bond, and ongoing reporting. Virtual currency transmission is generally subject to Texas money transmission licensing, with Texas Department of Banking guidance providing specific application criteria. Motion in Limine § A pretrial motion seeking the trial court's preliminary ruling on the admissibility of specified evidence, typically to exclude evidence that is irrelevant, unduly prejudicial, or otherwise objectionable. A granted limine motion does not finally exclude the evidence, it requires the proponent to approach the bench before mentioning the evidence in front of the jury, allowing the court to revisit admissibility in context. A motion in limine is a pretrial motion seeking the trial court's preliminary ruling on the admissibility of specified evidence, typically to prevent jury exposure to evidence that is irrelevant, unduly prejudicial, hearsay, character evidence, settlement communications, insurance, prior bad acts, or otherwise objectionable. Unlike a motion to exclude, a granted limine motion does not finally exclude the evidence, it requires the proponent to approach the bench before mentioning the evidence in the jury's presence, allowing the court to revisit admissibility in the context of trial. Authority Limine motions derive from the trial court's inherent authority to control the orderly conduct of trial. Procedural framework: not specifically addressed in Texas Rules of Civil Procedure; common-law tradition. Underlying evidentiary rules: Tex. R. Evid. 401-403 (relevance and prejudicial weighing); Rule 404 (character evidence and prior acts); Rule 408 (settlement communications); Rule 411 (liability insurance); Rule 802 (hearsay). Preservation of error: Acord v. General Motors Corp. , 669 S.W.2d 111 (Tex. 1984) (limine ruling alone does not preserve error; must object when evidence is offered). The limine procedure Limine motions are typically filed and heard at the pretrial conference, often jointly with motions to exclude expert testimony, motions to bifurcate, and other pretrial-management matters. The procedure: (1) written motion identifying specific evidence to be excluded, with supporting argument; (2) response from opposing party; (3) hearing , often informal, addressing the merits; (4) order granting or denying. A granted limine order typically requires the proponent to approach the bench before referencing the evidence; the trial court then revisits admissibility, often hearing the evidence outside the jury's presence before deciding. Limine vs. motion to exclude Limine motions and motions to exclude are functionally similar but procedurally distinct. Motion to exclude : seeks a final pretrial ruling that specified evidence is inadmissible at trial. Motion in limine : seeks a preliminary ruling that the evidence may not be referenced in the jury's presence without first approaching the bench. The limine procedure preserves the trial court's flexibility, evidence ruled inadmissible in the abstract may be admitted if its proponent can lay the proper foundation or if the opposing party "opens the door." For evidence that is clearly inadmissible (settlement amounts, liability insurance, prior convictions of a witness for impeachment without proper notice), a motion to exclude provides cleaner relief. Common limine subjects Recurring categories of limine motions in commercial cases: (1) settlement communications , Rule 408 protects most settlement discussions; (2) liability insurance , Rule 411 generally bars reference; (3) prior judgments and findings , generally not admissible to prove the underlying conduct; (4) other lawsuits , typically excluded as character evidence or unduly prejudicial; (5) "golden rule" arguments , asking jurors to put themselves in the plaintiff's place; (6) per diem damages arguments , limitations on calculating damages by reference to time; (7) witness criminal records , Rule 609 limits impeachment use; (8) references to claims previously dismissed or summary-judged ; (9) references to prior trial outcomes ; (10) discovery sanctions , generally inadmissible at trial. Preservation of error The single most common Texas trap: a limine ruling alone does not preserve error for appeal. Acord v. General Motors Corp. , 669 S.W.2d 111 (Tex. 1984), and progeny require that the objecting party also object when the evidence is offered at trial. The limine ruling preserves the issue only for purposes of preventing inadvertent jury exposure; the trial-time objection is what preserves admissibility for appellate review. Failure to object at trial waives the limine-protected issue. Many appeals fail because counsel relied on the limine ruling without making the trial objection. Violations of limine orders When opposing counsel violates a limine order, referencing protected evidence in the jury's presence without first approaching the bench, the appropriate response is immediate objection, motion to strike, request for instruction, and motion for mistrial if the violation is severe. The trial court has discretion to impose remedies ranging from instruction-to-disregard (most common) through mistrial (in egregious cases). Limine violations rarely produce mistrial but frequently produce strong instructions to the jury, which can be useful for the objecting party's case. Practical context For Texas commercial trial counsel, limine practice is often the deciding factor in trial preparation. Best practice: (1) prepare comprehensive limine motions covering all categories of objectionable evidence the opposing party may seek to introduce; (2) tailor specifically to the case, generic limine motions are routinely denied; (3) brief the supporting evidentiary rules clearly, with case citations; (4) preserve at trial, make the objection again when the evidence is offered, even if the limine motion was granted; (5) prepare for opposing limine motions with detailed responses showing why the evidence is admissible and necessary. Limine motions are often the trial counsel's last clean opportunity to shape what the jury will hear. Related Terms Daubert and Robinson Standards · Expert Witness Disclosure · Summary Judgment · Jury Charge Motion to Dismiss § A request to terminate a case (or specific claims) before merits discovery and trial, on grounds that the pleading fails to state a viable claim or that some other procedural defect bars the action. Texas TRCP 91a (no basis in law or fact) and federal Rule 12(b) provide overlapping but distinct mechanisms. A motion to dismiss is a request to the court to terminate a case (or specific claims) before merits discovery and trial, on grounds that the pleading fails to state a viable claim or that some other procedural defect bars the action. Texas and federal practice provide overlapping but distinct dismissal mechanisms. Authority Tex. R. Civ. P. 91a (dismissal of baseless causes of action, adopted 2013); Tex. R. Civ. P. 90 (defects in pleading); Federal: Fed. R. Civ. P. 12(b) (defenses by motion); Bell Atlantic Corp. v. Twombly , 550 U.S. 544 (2007); Ashcroft v. Iqbal , 556 U.S. 662 (2009). Texas Rule 91a, dismissal of baseless claims Texas's TRCP 91a , adopted in 2013, allows a motion to dismiss claims that have "no basis in law or fact." A claim has no basis in law if the allegations, taken as true, do not entitle the claimant to the relief sought. A claim has no basis in fact if no reasonable person could believe the facts pleaded. The 91a motion is decided based on the pleadings alone, no evidence may be considered. The motion must be filed within 60 days of service of the challenged pleading and decided within 45 days of filing. Successful 91a movants are entitled to attorney's fees. Federal Rule 12(b) motions Federal Rule 12(b) provides seven grounds for pre-answer dismissal: (1) lack of subject matter jurisdiction; (2) lack of personal jurisdiction; (3) improper venue; (4) insufficient process; (5) insufficient service of process; (6) failure to state a claim upon which relief can be granted; and (7) failure to join a necessary party. Rule 12(b)(6) (failure to state a claim) is the most-used. Twombly/Iqbal plausibility standard Under Twombly and Iqbal , federal Rule 12(b)(6) motions are evaluated against a plausibility standard, the complaint must contain "enough facts to state a claim to relief that is plausible on its face," not merely possible. Conclusory allegations and threadbare recitals of the elements of a claim do not survive. Other Texas dismissal mechanisms Plea to the jurisdiction: challenges the court's subject matter jurisdiction; not waivable. Special exceptions ( TRCP 90–91 ): challenge defects in pleadings that are not fatal but require amendment. Practical context Texas's TRCP 91a is more procedurally favorable to defendants than the pre-2013 special-exception practice, but the substantive standard ("no basis in law or fact") remains less stringent than federal Rule 12(b)(6) plausibility. Strategic defendants in Texas often consider whether removal to federal court, and the resulting Twombly / Iqbal exposure, is worth pursuing. Related Terms Petition / Complaint · Answer · Subject Matter Jurisdiction · Summary Judgment N No-Shop Provision § A contractual provision prohibiting the seller (or one party) from soliciting, encouraging, or accepting competing offers during a defined period, typically while a transaction is being negotiated and documented. Standard in M&A letters of intent, definitive agreements, and venture term sheets. Public-company no-shops typically include "fiduciary out" provisions allowing acceptance of superior unsolicited offers consistent with directors' fiduciary duties. Private-company no-shops are typically absolute. A No-Shop Provision is a contractual provision prohibiting the seller (or one party) from soliciting, encouraging, or accepting competing offers during a defined period, typically while a transaction is being negotiated and documented. No-shops are standard in M&A letters of intent, definitive agreements, and venture term sheets. They protect the buyer's investment in due diligence and legal costs by ensuring exclusive negotiation. Public-company no-shops typically include "fiduciary out" provisions allowing acceptance of superior unsolicited offers consistent with directors' fiduciary duties; private-company no-shops are typically absolute. Authority Generally not statutorily defined; governed by contract law of governing jurisdiction. Public-company fiduciary-out doctrine: Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. , 506 A.2d 173 (Del. 1986) (Revlon duties); Paramount Communications, Inc. v. QVC Network, Inc. , 637 A.2d 34 (Del. 1994); Omnicare, Inc. v. NCS Healthcare, Inc. , 818 A.2d 914 (Del. 2003) (no-shop with no fiduciary out invalid). Texas contract law: general principles of Texaco v. Pennzoil , 729 S.W.2d 768 (Tex. App.-Houston [1st Dist.] 1987, writ ref'd n.r.e.) on tortious interference exposure. Standard no-shop terms Comprehensive no-shop provisions include: (1) scope of prohibited activity , solicitation, negotiation, providing information; (2) covered transactions , competing acquisition, merger, recapitalization, joint venture; (3) covered counterparties , typically includes intermediaries, advisors; (4) duration , typically 30-90 days for term sheets; through closing for definitive agreements; (5) notification obligations , duty to notify of unsolicited inquiries; (6) break-up fee , payment if seller terminates for competing offer; (7) specific performance , equitable remedies for breach; (8) fiduciary out , narrow exception for public-company directors. Public-company fiduciary out Delaware law (Revlon, Paramount/QVC, Omnicare) imposes fiduciary duties on public-company directors that limit no-shop enforceability. Standard fiduciary-out provisions: (1) unsolicited proposal received without breach of no-shop; (2) superior proposal determination, economically superior, reasonably likely to close; (3) matching right , original buyer can match; (4) termination right with break-up fee. Without fiduciary out, no-shop may be unenforceable as breach of fiduciary duty (Omnicare). Practical implication: public-company sellers cannot agree to absolute no-shop. Private-company no-shops Private companies face fewer fiduciary constraints. Private-company no-shops are typically: (1) absolute during stated period; (2) with strict notice obligations for unsolicited approaches; (3) with break-up fees in some structures; (4) supported by specific performance remedies. Private-company sellers retain more flexibility through negotiation but typically agree to genuine exclusivity to access buyer's diligence investment. Private-equity sellers and strategic sellers face different tactical considerations. Break-up fees Break-up fees compensate the buyer if the seller terminates the transaction for a competing offer: (1) typical range , 1-3% of deal value; (2) structure , payable on execution of competing definitive agreement OR completion of competing transaction; (3) reverse break-up fee , paid by buyer if buyer fails to close (financing, regulatory); (4) matching rights , original buyer's right to match competing offer before triggering break-up fee. Break-up fees compensate buyer for diligence and opportunity costs. Drafting considerations Effective no-shop drafting: (1) broad activity scope , cover discussions, negotiations, providing information; (2) broad counterparty scope , include intermediaries, financial advisors; (3) notice obligations , for any inquiry; (4) response obligations , typically reject and inform original buyer; (5) specific performance available; (6) survival , through closing or termination. Sophisticated drafting balances buyer protection with seller flexibility for fiduciary obligations. Practical context For Texas M&A and venture deal-makers, no-shop provisions are critical negotiation points. Best practice for buyers: (1) require comprehensive no-shop with notice obligations; (2) include break-up fee for substantial diligence/legal investment; (3) include specific performance remedy; (4) for public-company targets, accept fiduciary out within limits. For sellers: (1) negotiate no-shop duration carefully, 30-45 days typical for term sheets; (2) for public-company targets, ensure proper fiduciary out provisions; (3) limit covered transactions to actual competitors; (4) negotiate match rights. For private equity: (1) standardize no-shop templates by deal type; (2) coordinate with reverse break-up fees and financing contingencies. Common pitfall: vague no-shop language allowing seller to engage in competing discussions without technically violating provision. Companion article: Selling Your Business Related Terms Letter of Intent · Term Sheet · Asset Purchase · Stock Purchase · Fiduciary Duty Noncompete Agreement / Covenant Not to Compete § 2025 A contractual restriction prohibiting an employee, after employment ends, from competing with the former employer within a specified geographic area, time period, and scope of activity. SB 1318 (eff. Sept. 1, 2025) added new restrictions for healthcare practitioners. A noncompete agreement (or "covenant not to compete") is a contractual restriction prohibiting an employee, after employment ends, from competing with the former employer within a specified geographic area, time period, and scope of activity. Texas enforces noncompetes under a specific statutory framework that diverges from common-law principles in many other states. Authority Tex. Bus. & Com. Code §§ 15.50, 15.501 (added by SB 1318, eff. September 1, 2025), 15.51, 15.52 . Leading cases: Marsh USA Inc. v. Cook , 354 S.W.3d 764 (Tex. 2011); Light v. Centel Cellular Co. of Texas , 883 S.W.2d 642 (Tex. 1994); Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding , 289 S.W.3d 844 (Tex. 2009). General enforceability standard Under § 15.50(a) , a noncompete is enforceable if (1) it is "ancillary to or part of an otherwise enforceable agreement" at the time the agreement is made; and (2) it contains limitations on time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than necessary to protect the goodwill or other business interest of the promisee. The "otherwise enforceable agreement" requirement The noncompete cannot stand alone, it must accompany a separate enforceable agreement. Under Light and Mann Frankfort , the underlying agreement most commonly involves the employer's promise to provide the employee with confidential information, trade secrets, or specialized training. Continued at-will employment alone is insufficient consideration. Under Marsh USA , stock option grants and similar equity-based consideration also satisfy the requirement, broadening the universe of enforceable noncompete structures. Reasonableness Texas courts evaluate three reasonableness dimensions: time (typical: 6 months to 2 years), geographic area (typical: limited to the employee's actual sales territory or office reach), and scope of activity (typical: limited to the specific role or competing services the employee performed). Overbroad agreements are subject to judicial reformation under § 15.51 , Texas courts narrow rather than void unreasonable agreements. SB 1318 healthcare practitioner restrictions (eff. Sept. 1, 2025) New § 15.501 imposes specific limits on noncompetes against healthcare practitioners, physicians, dentists, nurses, and physician assistants. Among the requirements: (1) for physicians, geographic restrictions limited to a five-mile radius from primary practice location; (2) maximum one-year duration; (3) buyout cap not exceeding the practitioner's annual salary; (4) patient access protections, including continuity of care and access to patient records; (5) for non-physician practitioners, similar structural limits but without the "good cause" termination protection. Amended § 15.52 confirms that §§ 15.50, 15.501, and 15.51 are exclusive, preempting common-law alternatives. Federal context The FTC's April 2024 noncompete ban was permanently blocked by federal court injunction; the FTC abandoned its appeal in September 2025 and shifted to industry-by-industry case enforcement. Texas-law analysis controls for nearly all Texas-based employment noncompetes. Practical context Texas's noncompete framework is more employer-friendly than most states' frameworks but is not unlimited. Sophisticated employer practice involves: (1) tying the noncompete to a robust grant of confidential information at the start of employment; (2) drafting reasonable time, geographic, and scope limits; (3) including provisions for judicial reformation if a court finds the agreement overbroad; and (4) for healthcare employers, full SB 1318 compliance from September 1, 2025 forward. Companion article: Non-Competes in Texas Related Terms Nonsolicitation Agreement · Trade Secret · Confidentiality Agreement · Employment Agreement · At-Will Employment Nonjudicial Foreclosure § A foreclosure conducted under a deed of trust's power-of-sale provision without court involvement. The trustee sells the property at public auction on the first Tuesday of the month between 10 a.m. and 4 p.m. on the courthouse steps in the county where the property is located. Texas Property Code § 51.002 governs notice requirements: 20-day notice of default and intent to accelerate, then notice of sale at least 21 days before the sale date. Nonjudicial foreclosure is a foreclosure conducted under a deed of trust's contractual power of sale, without court involvement. The trustee (typically a substitute trustee appointed by the lender) sells the property at public auction on the first Tuesday of the month, between 10 a.m. and 4 p.m., at the location designated in the county where the property is located (typically courthouse steps or a designated commissioners-court area). Texas's nonjudicial foreclosure framework, codified principally in Property Code § 51.002, is one of the most lender-friendly foreclosure regimes in the United States, completing a foreclosure in roughly 60-90 days from default in commercial cases. Authority Texas foreclosure framework: Tex. Prop. Code Ch. 51 . Core provision: § 51.002 (sale of real property under contract lien). Definitions: § 51.0001 . Trustee provisions: § 51.0074 (duties limited to security instrument terms); § 51.007 (trustee dismissal in litigation). "As is" sale: § 51.009 . Deficiency judgment: § 51.003 . Statute of limitations: Tex. Civ. Prac. & Rem. Code § 16.035 . Federal RESPA constraints on residential foreclosure: 12 U.S.C. § 2605 ; 12 C.F.R. § 1024.41 . Notice of default and intent to accelerate Section 51.002(d) requires that the mortgage servicer serve the debtor with a notice of default and intent to accelerate, providing at least 20 days to cure the default before notice of sale may be served. The notice must (1) identify the default; (2) state the amount required to cure; (3) state the deadline for cure; (4) inform the debtor of the right to reinstate. The 20-day period is the residential statutory minimum and is non-waivable for principal-residence foreclosures. For commercial property, the contractual notice provisions of the deed of trust govern, often providing 30 days or more. Notice of sale After the cure period expires without cure, Section 51.002(b) requires the lender to (1) file the notice of sale with the county clerk; (2) post the notice at the courthouse door designated by the commissioners court; (3) serve a written notice to the debtor by certified mail. The notice of sale must be filed, posted, and served at least 21 days before the foreclosure sale date. Section 51.002(f-1) (effective for certain time periods) requires posting on the county's internet website. Defective notice, wrong dates, wrong amounts, omission of required content, can invalidate the foreclosure sale. The first-Tuesday rule Foreclosure sales must occur on the first Tuesday of the month, regardless of holidays. The sale must occur between 10 a.m. and 4 p.m. local time, in a three-hour window stated in the notice. The sale takes place at the designated location (courthouse steps or commissioners-designated area) in the county where the property is located. Foreclosure auctioneers conduct multiple sales each first Tuesday, the formal auction format takes only a few minutes per property. Most properties receive a single bid (the lender's credit bid); occasionally third-party bidders compete, particularly for properties with substantial equity above the debt. Conduct of the sale The trustee opens bidding, typically with a credit bid by the lender (an offset against the debt rather than cash). Third-party bidders must demonstrate ability to pay cash. The property is sold "as is, where is" without warranties (other than warranty of title to the extent provided in the deed of trust) under § 51.009. The highest bidder receives a trustee's deed (or substitute trustee's deed) which is recorded with the county clerk to evidence the conveyance. Cash bidders must tender payment same-day; the trustee delivers the deed against the cash payment. Wrongful foreclosure Borrowers can challenge a completed foreclosure through wrongful-foreclosure claims, typically asserting (1) defective notice; (2) failure to satisfy preconditions to sale; (3) pretextual default (lender accepted late payments inconsistent with strict performance); (4) breach of duty (rare, given trustee's limited duties under § 51.0074); (5) "grossly inadequate" sale price under prior case law standards. Successful wrongful-foreclosure claims can result in setting aside the sale, monetary damages, or attorney's fees in narrow circumstances. Section 51.007 provides procedures for dismissing trustees from such litigation when named solely in their capacity as trustees. Statute of limitations Section 16.035 of the Civil Practice and Remedies Code imposes a four-year limitations period on real-property foreclosure, typically running from acceleration (where the loan has an acceleration clause). A barred lien is unenforceable; the underlying personal obligation may continue to exist but cannot be enforced through foreclosure. Lenders should calendar acceleration dates carefully and consider rescission of acceleration where enforcement will be delayed past the four-year mark. Practical context For Texas commercial real estate borrowers facing potential foreclosure, the nonjudicial framework's speed creates urgency. From notice of default to foreclosure sale, the process can complete in 50-60 days. Best practice for borrowers: (1) act immediately upon receipt of notice of default, cure or negotiate before notice of sale issues; (2) verify proper notice content and service (notice defects can support TROs blocking the sale); (3) consider deed-in-lieu, short sale, or forbearance agreement as alternatives to forced sale; (4) calendar the sale date and consider TRO if reasonable defense exists; (5) for commercial properties with substantial equity, consider chapter 11 to invoke the automatic stay and pursue a plan-based outcome. For lenders, the speed of nonjudicial foreclosure is a powerful collection tool but requires meticulous compliance with notice and procedural requirements. Related Terms Deed of Trust · Deficiency Judgment · Default · Acceleration Clause · Promissory Note · Guaranty Agreement Nonsolicitation Agreement § A contractual restriction prohibiting a former employee from soliciting the employer's customers, employees, or both for a specified period after employment ends. Texas treats nonsolicitation agreements as a category of restraint on trade subject to the same statutory framework as noncompete agreements. A nonsolicitation agreement is a contractual restriction prohibiting a former employee from soliciting the employer's customers, employees, or both for a specified period after employment ends. Texas treats nonsolicitation agreements as a category of restraint on trade subject to the same statutory framework as noncompete agreements. Authority Tex. Bus. & Com. Code §§ 15.50, 15.51, 15.52 . Marsh USA Inc. v. Cook , 354 S.W.3d 764, 776 n.6 (Tex. 2011) (dictum extending § 15.50 to employee nonsolicitation). Two principal forms Customer nonsolicitation: prohibits the former employee from soliciting business from customers of the former employer with whom the employee had material contact during employment. This is the more common and more readily enforced form. Employee nonsolicitation (or "no-poach"): prohibits the former employee from recruiting or soliciting the former employer's other employees to leave their employment. Under Marsh USA , employee nonsolicitation provisions are subject to § 15.50 , meaning they must be ancillary to an otherwise enforceable agreement and reasonable in scope. Reasonableness factors Customer nonsolicitation agreements are typically more readily enforced than full noncompete agreements because they impose a narrower restraint on the employee's ability to earn a living. Texas courts examine: (1) duration (typical: 1–2 years); (2) the customer scope (limited to customers the employee served or learned about during employment, not all customers of the employer); and (3) the activities prohibited (active solicitation versus accepting unsolicited business). Practical context Many Texas employers use customer nonsolicitation provisions in lieu of full noncompetes for sales and account-management roles, achieving substantial protection of customer relationships without the broader restriction of geographic noncompete. Employee nonsolicitation provisions are subject to greater scrutiny since Marsh USA and require careful drafting. Companion article: Non-Competes in Texas Related Terms Noncompete Agreement · Trade Secret · Confidentiality Agreement · Employment Agreement O Officer § 2025 An individual elected or appointed by the board of directors to manage the day-to-day affairs of a Texas corporation under the board's supervision. Common officers include president, secretary, treasurer, and CEO. Officers act as agents of the corporation. An officer of a Texas corporation is an individual elected or appointed by the board of directors to manage the day-to-day affairs of the corporation under the board's supervision. Common officers include the president, secretary, treasurer, and chief executive officer. Officers act as agents of the corporation; their authority derives from the corporation's certificate of formation, bylaws, board resolutions, and Texas common-law agency principles. Authority Tex. Bus. Orgs. Code Subchapter F of Chapter 21: §§ 21.301 (officer designation); 21.302 (titles and duties); 21.303 (officer authority); 21.304 (resignation); 21.305 (removal). Common-law fiduciary duties applicable to officers under Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014). Codified business judgment rule under § 21.419 (eff. May 14, 2025) applies to officers of publicly-traded and opt-in corporations. Required officers Texas does not statutorily require any specific officer titles. Under § 21.301 , the corporation's bylaws or a board resolution determines what officers exist, their titles, and their respective duties. The same person may hold multiple officer positions. Appointment, removal, term Officers are typically appointed by the board of directors at the first meeting following the annual shareholder meeting. § 21.302 . Under § 21.305 , an officer may be removed by the board with or without cause; the removed officer's contract rights, if any, are unaffected by removal. Authority to bind the corporation Officers bind the corporation through actual authority (express grants in bylaws or resolutions) and apparent authority (acts within the scope of authority that third parties reasonably believe an officer holds). § 21.303 . The president and chief executive officer typically have broad apparent authority for acts in the ordinary course; specialized acts (real estate transactions, large borrowings, asset sales) often require board authorization. Fiduciary duties and SB 29 Officers owe fiduciary duties to the corporation under Texas common law, duties of care, loyalty, and obedience, paralleling director duties. See Fiduciary Duty . Effective May 14, 2025, the codified business judgment rule under § 21.419 (added by SB 29) extends rebuttable statutory presumptions of good faith, informed basis, corporate-interest furtherance, and legal compliance to officers of publicly-traded and opt-in corporations. See Business Judgment Rule . Indemnification Officers are entitled to mandatory indemnification under § 8.051 when wholly successful in defense of a proceeding, and may receive permissive indemnification under §§ 8.101–8.102 subject to the standards-of-conduct test. See Indemnification (Corporate) . Practical context The TBOC's flexibility on officer designation contrasts with older state statutes that required specific titles (president, secretary, treasurer). Texas corporations may structure their executive ranks however the bylaws and board direct, including modern titles such as Chief Operating Officer, Chief Legal Officer, or Managing Director. Officer selection and authority documentation are routine but consequential, a corporate transaction signed by an unauthorized officer may be void or voidable. Related Terms Director · Corporation · Bylaws · Fiduciary Duty · Business Judgment Rule · Indemnification (Corporate) Open-Source License § A copyright license that grants users the right to access, modify, and redistribute the source code of software, subject to specified obligations. Divided between permissive licenses (MIT, Apache, BSD) imposing minimal conditions, and copyleft licenses (GPL, AGPL, LGPL) requiring derivative works to be released under the same license. An open-source license is a copyright license that grants users the right to access, modify, and redistribute the source code of software, subject to specified conditions. Open-source licenses fall into two principal categories: permissive licenses (MIT, Apache 2.0, BSD), which impose minimal obligations on downstream users; and copyleft licenses (GPL, AGPL, LGPL), which require derivative works to be released under the same license. The choice between categories has substantial commercial consequences. Authority Open-source licenses are copyright licenses under federal law, 17 U.S.C. § 101 et seq. Enforcement: Jacobsen v. Katzer , 535 F.3d 1373 (Fed. Cir. 2008) (open-source license conditions are enforceable as copyright restrictions, not mere covenants). Common license texts (Open Source Initiative-approved): MIT License; Apache License 2.0; BSD 2-Clause and 3-Clause Licenses; GNU General Public License v2 and v3; GNU Affero General Public License v3; GNU Lesser General Public License. Permissive licenses MIT, Apache 2.0, and BSD licenses permit virtually any use, modification, or redistribution, with only modest attribution and notice obligations. The Apache 2.0 license adds an explicit patent grant from contributors and a patent-retaliation clause. Permissive licenses do not require derivative works to be open-sourced. Most modern enterprise software stacks combine code under permissive licenses with proprietary code without infecting the proprietary portion. Copyleft licenses The GNU General Public License (GPL) requires that any derivative work distributed to third parties be made available under the same GPL terms, including the requirement to provide source code. This is the "copyleft" obligation. The Lesser GPL (LGPL) softens this for libraries linked to proprietary code. The Affero GPL (AGPL) extends the obligation to network use, running AGPL software on a server accessed by users over a network triggers the source-code obligation, even without distribution. License compatibility and stacking Combining code under different open-source licenses is permissible only when the licenses are compatible. GPL is incompatible with most non-GPL licenses for purposes of linking GPL code into a larger work. Apache 2.0 and GPL v2 are incompatible; Apache 2.0 and GPL v3 are compatible (in one direction). Compatibility analysis is fact-specific and should be done before any code is incorporated into a commercial product. Commercial risk in copyleft The principal commercial risk is unintended copyleft contamination of proprietary code. Static linking to GPL libraries, incorporating GPL code into a proprietary application, or using AGPL code in a SaaS deployment can trigger source-code disclosure obligations covering the entire combined work. Texas software companies acquiring code from contractors or in M&A should perform license audits as part of due diligence. Practical context Open-source license obligations have become a standard M&A diligence item, buyers run automated license-scanning tools across the target's codebase. Texas businesses building software products should maintain a software bill of materials (SBOM) tracking every open-source dependency and its license. The cost of a license-compliance program is small compared to the cost of GPL contamination discovered during a sale process. Related Terms License Agreement · Software License Agreement · Copyright · Due Diligence · Representations and Warranties Option Pool § A reserved block of common stock authorized for issuance as equity compensation to employees, advisors, directors, and consultants. Typically structured under a Stock Incentive Plan or Equity Incentive Plan. Standard pool size: 10-20% of fully-diluted post-money capitalization for VC-backed companies. Includes Incentive Stock Options (ISOs, tax-advantaged for employees), Non-Qualified Stock Options (NSOs), Restricted Stock Awards (RSAs), and Restricted Stock Units (RSUs). An Option Pool is a reserved block of common stock authorized for issuance as equity compensation to employees, advisors, directors, and consultants. Standard option pools are structured under a Stock Incentive Plan or Equity Incentive Plan. Standard pool size: 10-20% of fully-diluted post-money capitalization for VC-backed companies. The pool typically includes various equity instruments: Incentive Stock Options (ISOs, tax-advantaged for employees), Non-Qualified Stock Options (NSOs), Restricted Stock Awards (RSAs), and Restricted Stock Units (RSUs). Pool sizing and refresh is among the most negotiated cap table issues. Authority Federal tax: 26 U.S.C. § 422 (Incentive Stock Options); 26 U.S.C. § 421 (general statutory option provisions); 26 U.S.C. § 83 (property transferred for services, RSAs, RSUs); 26 U.S.C. § 409A (deferred compensation rules, affects option pricing). Securities: 17 C.F.R. § 230.701 (Rule 701, exemption for compensatory grants); SEC Form S-8 for public companies. State law: governed by state corporate law of state of incorporation. Tax compliance: 26 C.F.R. § 1.422-1 et seq. (ISO regulations). Stock incentive plan adoption Option pool requires adoption of formal Stock Incentive Plan: (1) board approval of plan terms; (2) stockholder approval , required for ISO qualification under § 422; (3) plan terms , pool size, eligible recipients, types of awards, vesting parameters, expiration, transferability; (4) amendments , typically require board approval; some material amendments require stockholder approval. Plans typically allow flexibility, different vesting schedules, exercise prices, and award types within plan parameters. ISO vs. NSO Two principal option types: (1) Incentive Stock Options (ISOs) , § 422; tax-advantaged for employees; no income tax at grant or exercise (subject to AMT); long-term capital gains on sale if holding period met (2 years from grant + 1 year from exercise); $100K annual vesting limit; only employees eligible; 10-year maximum term; exercise price ≥ FMV at grant; (2) Non-Qualified Stock Options (NSOs) , no special tax treatment; ordinary income on exercise (spread between FMV and exercise price); broader eligibility (employees, contractors, advisors, directors); fewer constraints. Most companies use mix of ISOs (for employees) and NSOs (for others). Section 409A and exercise pricing Section 409A imposes substantial penalties on options with exercise prices below fair market value at grant. Standard practice: (1) 409A valuation , independent valuation determining FMV at grant; (2) annual valuation at minimum; updates for material events; (3) safe harbor , using independent appraiser provides safe harbor against 409A challenge; (4) penalties , if 409A violated, holder owes immediate income tax plus 20% additional tax plus interest. 409A compliance is non-negotiable for legitimate option grants. 409A valuations typically cost $5K-$15K annually. Vesting schedules Standard vesting: (1) 4-year vesting with 1-year cliff , most common; 25% vests after 12 months, then monthly vesting over remaining 36 months; (2) monthly vesting without cliff , for senior hires or specific arrangements; (3) milestone vesting , vesting tied to specific business milestones; less common; (4) accelerated vesting , provisions for acceleration on change of control (single-trigger or double-trigger). Founder vesting often parallels but with negotiated acceleration provisions. Acceleration provisions Common acceleration provisions: (1) single-trigger , full or partial vesting on change of control alone; common for founders; (2) double-trigger , full or partial vesting on change of control PLUS termination without cause within specified period (typically 12 months); standard for senior employees; (3) partial acceleration , typically 12 months of additional vesting; (4) full acceleration , all unvested options vest. Acceleration provisions are heavily negotiated; investors typically prefer no/minimal acceleration; founders/employees prefer full acceleration. Common compromise: double-trigger with full acceleration. Pool sizing and refresh Pool sizing decisions: (1) initial pool , at incorporation, often 10-20% of common; (2) pre-Series A pool , often expanded to 15-20% post-money for first VC round; (3) refresh at each round , typically maintained at 10-15% of fully-diluted post-money; (4) pre-money vs. post-money , investor-favorable vs. founder-favorable. Pool dilution is a significant founder concern, over multiple rounds, option pool can consume 20-30% of total equity. Modeling cumulative dilution is essential. Rule 701 securities exemption Rule 701 provides federal securities law exemption for compensatory grants by non-public companies: (1) no aggregate limit ; (2) per-grant limits , based on issuer assets, shares outstanding, or recipient count; (3) disclosure requirements , for grants exceeding $10M in any 12-month period, formal disclosure required; (4) relationship requirement , recipients must be employees, directors, consultants, or advisors. Rule 701 is the standard exemption for option grants; combined with state-law exemptions (typically in parallel), it covers most private-company option practice. RSAs vs. RSUs Other equity instruments often used alongside or instead of options: (1) Restricted Stock Awards (RSAs) , actual stock issued at grant subject to vesting/forfeiture; common for founder grants; § 83(b) election available to elect taxation at grant; (2) Restricted Stock Units (RSUs) , promise to issue stock at future date when vested; common at later-stage and public companies; income tax at vesting (no §83(b) available); (3) Phantom Equity , cash-settled rights tracking equity value. Each instrument has different tax, accounting, and economic implications. Practical context For Texas startups, option pool design and management is critical. Best practice: (1) adopt formal Stock Incentive Plan with stockholder approval; (2) obtain 409A valuation before option grants, annual updates minimum; (3) document all grants with formal grant agreements and vesting schedules; (4) coordinate ISO vs. NSO designations based on recipient type; (5) maintain accurate cap table including option pool tracking; (6) plan pool sizing with eye to multi-round dilution; (7) for senior hires, negotiate acceleration provisions thoughtfully (double-trigger standard); (8) coordinate with cap table software for ongoing administration. For employees: (1) understand ISO vs. NSO tax differences; (2) consider exercise timing and §83(b) election where available; (3) review vesting schedule and acceleration provisions; (4) preserve documentation of grants and exercises. Common pitfall: companies granting options without 409A valuation or with stale valuation, creating substantial 409A exposure for option holders. 409A compliance is non-negotiable. Related Terms Section 83(b) Election · Cap Table · Preferred Stock · Term Sheet · Section 1202 P Pass-Through Entity § A business entity that does not pay federal income tax at the entity level. Income, deductions, gains, losses, and credits "pass through" to the owners, who report their distributive shares on their individual tax returns. Includes partnerships, LLCs taxed as partnerships, S-corporations, and disregarded single-member LLCs. A pass-through entity (also called a flow-through entity) is a business entity that does not pay federal income tax at the entity level. Instead, the entity's income, deductions, gains, losses, and credits "pass through" to the owners, who report their distributive shares on their individual income tax returns. The principal pass-through entity types are general and limited partnerships, LLCs taxed as partnerships (the default for multi-member LLCs), S-corporations, and disregarded single-member LLCs. Authority Partnership taxation: 26 U.S.C. §§ 701-777 (Subchapter K); IRS Form 1065. S-corporation taxation: 26 U.S.C. §§ 1361-1379 (Subchapter S); IRS Form 1120-S. Entity classification: 26 C.F.R. § 301.7701-1 et seq. (check-the-box regulations); IRS Form 8832 (Entity Classification Election). Disregarded entity treatment for single-member LLCs: 26 C.F.R. § 301.7701-3(b)(1)(ii) . Section 199A pass-through deduction: 26 U.S.C. § 199A . Pass-through types compared The principal pass-through structures: (1) General partnership , default treatment for two or more persons carrying on a business for profit; no entity-level filing; flexible allocations; unlimited liability for partners. (2) Limited partnership , pass-through with limited liability for limited partners but at least one general partner with unlimited liability. (3) LLC taxed as partnership , most common modern structure; combines limited liability with partnership flow-through. (4) S-corporation , pass-through corporation with strict eligibility rules (100-shareholder cap, single class of stock, U.S. individuals/certain trusts only). (5) Disregarded entity , single-member LLC; treated as part of owner for federal tax purposes; activity reported on owner's Schedule C, E, or 1120 depending on owner type. Distributive share vs. distribution A critical pass-through concept: the owner's tax obligation is based on the entity's allocated share of income (the "distributive share" reported on the K-1), not on cash distributed . An LLC member owning 25% of a partnership reporting $400,000 of income is taxed on $100,000, regardless of whether the LLC distributed any cash. This mismatch creates phantom income and is the principal driver of tax-distribution provisions in operating agreements. See Phantom Income . Section 199A, the QBI deduction Pass-through owners may qualify for the Qualified Business Income deduction under § 199A (20% deduction on qualified business income), which expires for tax years beginning after December 31, 2025 unless extended. The deduction is subject to wage and qualified property limits, with reduced benefits for "specified service trade or business" activities (law, health, accounting, financial services, consulting, athletics, performing arts) above income thresholds. Taxpayers and entities should monitor 2025-2026 legislation for extension or modification. Practical context Pass-through structure has been the default choice for closely-held Texas businesses for decades. The 2017 reduction of the C-corp rate to 21% combined with Section 1202 has reopened the structural question for some founders, particularly those building toward an exit or seeking institutional financing. The right answer depends on (1) financing plans; (2) ownership profile; (3) distribution vs. retention strategy; (4) state-tax exposure across multiple jurisdictions; (5) exit horizon. The decision should be made deliberately and revisited at each major corporate event. Related Terms S-Corporation Election · C-Corporation Tax Treatment · Limited Liability Company · Schedule K-1 · Tax Distribution Provision Patent § A federal grant of the right to exclude others from making, using, selling, offering for sale, or importing a claimed invention for a limited term. Three principal types: utility patents (functional inventions), design patents (ornamental designs), and plant patents (asexually reproduced plants). Issued by the USPTO; litigated in federal district court and the Federal Circuit. A patent is a federal grant of the right to exclude others from making, using, selling, offering for sale, or importing a claimed invention for a limited term. Patents do not grant the patentee an affirmative right to practice the invention, only the right to exclude others. Three principal types exist: utility patents (functional inventions, 20-year term from filing), design patents (ornamental product designs, 15-year term from issuance), and plant patents (asexually reproduced plants, 20-year term from filing). Authority Patent Act, 35 U.S.C. § 1 et seq.: § 101 (patentable subject matter); § 102 (novelty and statutory bars); § 103 (non-obviousness); § 112 (specification, written description, enablement, claim definiteness); § 154 (term); § 261 (assignment); § 271 (infringement); § 284 (damages); § 285 (attorney's fees in exceptional cases). Subject-matter eligibility framework: Alice Corp. v. CLS Bank International , 573 U.S. 208 (2014). Patent venue: TC Heartland LLC v. Kraft Foods Group Brands LLC , 581 U.S. 258 (2017). Federal subject-matter jurisdiction: 28 U.S.C. § 1338 . Patentability requirements A claimed invention must be (1) directed to patentable subject matter under § 101, generally machines, manufactures, compositions of matter, and processes, but excluding abstract ideas, laws of nature, and natural phenomena under Alice ; (2) novel under § 102, not previously disclosed in the prior art; (3) non-obvious under § 103, not an obvious variation of the prior art to a person of ordinary skill in the art at the time of the invention; and (4) adequately disclosed under § 112, the specification must enable a skilled artisan to make and use the invention without undue experimentation. Prosecution Patents are obtained through prosecution before the USPTO. The applicant files a specification (description plus claims), the examiner conducts a prior-art search and issues office actions, and the applicant responds with claim amendments and arguments. Average pendency is two to three years. Prosecution history establishes the claim scope and is binding on the applicant in subsequent litigation under the doctrines of file-wrapper estoppel and disclaimer. Infringement and remedies Infringement is established by showing that the accused product or method meets every limitation of at least one asserted claim, either literally or under the doctrine of equivalents. Remedies include actual damages no less than a reasonable royalty under § 284, treble damages for willful infringement, attorney's fees in exceptional cases under § 285, and injunctive relief. Patent damages frequently dominate IP litigation, verdicts in the hundreds of millions are not unusual in major commercial cases. Texas patent venue Patent infringement cases must be filed (1) in the judicial district where the defendant resides, for corporations, the state of incorporation under TC Heartland , or (2) where the defendant has committed acts of infringement and has a regular and established place of business. The Eastern District of Texas was historically the dominant patent-litigation venue under pre- TC Heartland doctrine; the Western District of Texas (Waco Division) became prominent post- TC Heartland through the case-management practices of Judge Albright, before the 2022 reassignment order redistributed cases across the WDTX. Both districts remain significant patent venues. Practical context Patents are expensive to obtain (typically $15K-$30K through issuance for a single utility patent) and very expensive to enforce ($3M-$5M through trial in a typical case). For most Texas SMBs, the strategic question is not "should we patent" but "should we patent, keep as trade secret, or rely on first-mover advantage." Patenting commits to public disclosure in exchange for the time-limited exclusion right; trade secrecy preserves the information indefinitely but offers no protection against independent development or reverse engineering. Related Terms Trade Secret · Trademark · Copyright · License Agreement · IP Assignment · Injunctive Relief Pay-When-Paid vs. Pay-If-Paid § Two contingent-payment provisions in construction subcontracts. A "pay-when-paid" clause is a timing provision, the subcontractor will be paid within a reasonable time after the prime contractor receives payment. A "pay-if-paid" clause is a condition precedent, the subcontractor receives nothing unless the prime contractor receives payment. Both are subject to the Texas Prompt Payment Act's mandatory 7-day downstream payment rule when funds flow. Pay-when-paid and pay-if-paid clauses are two distinct contingent-payment mechanisms used in construction subcontracts to allocate the risk of owner non-payment between the prime contractor and its subcontractors. The clauses look superficially similar but have very different legal effects. Texas courts have recognized both clause types but distinguish them carefully, and in practice the Prompt Payment Act's 7-day downstream payment rule (Property Code Ch. 28) limits how far the contingency can be pushed. Authority General contract law in Texas. Prompt Payment Act: Tex. Prop. Code Ch. 28 (private construction); Tex. Gov't Code Ch. 2251 (public construction). Foundational pay-if-paid case (federal interpretation of Texas law): Christian & Associates, Inc. v. McFaddin Hotel Co. , line of cases addressing condition-precedent vs. timing constructions. Key California precedent reasoning often cited: Wm. R. Clarke Corp. v. Safeco Ins. Co. , 938 P.2d 372 (Cal. 1997) (pay-if-paid against public policy). Texas approach: enforceable if clearly drafted as condition precedent; default construction is pay-when-paid (timing only). Pay-when-paid (timing provision) A pay-when-paid clause is interpreted as merely setting the timing of payment, the subcontractor will be paid within a reasonable time after the prime contractor receives payment from the owner. If the owner ultimately does not pay, the subcontractor is still entitled to payment from the prime contractor; the prime simply has a reasonable additional time to obtain funds from another source. Texas courts default to a pay-when-paid construction unless the contract very clearly establishes a condition precedent. Pay-if-paid (condition precedent) A pay-if-paid clause attempts to make owner payment a true condition precedent, if the owner never pays, the subcontractor is never entitled to payment. The Texas approach: such clauses are enforceable, but ONLY if drafted with unambiguous condition-precedent language. Common enforceable patterns: "Receipt of payment from the Owner is an express condition precedent to Subcontractor's right to payment" or similar. Generic "pay when paid" or "pay only when received" language defaults to the timing construction. Prompt Payment Act overlay Once the prime contractor receives payment from the owner, the Prompt Payment Act (Property Code Ch. 28) mandates payment to the subcontractor within 7 days. The contingent-payment clause cannot extend this statutory floor. The interaction matters: a pay-if-paid clause may shift the risk of owner non-payment to the subcontractor, but it cannot delay payment beyond the 7-day window once funds are received. Multi-tier flow-down is similarly capped. Texas case law trends Texas courts have generally enforced pay-if-paid clauses when drafted with sufficient clarity, but several decisions have struck down clauses where the contract language was ambiguous, where the contractor's own breach contributed to non-payment, or where the clause conflicted with statutory protections. Recent Texas appellate decisions have recognized contingent payment unenforceability where the prime contractor's failures caused the owner's non-payment, treating that as a self-induced condition. Lien rights preserved Importantly, neither pay-when-paid nor pay-if-paid clauses eliminate the subcontractor's mechanic's lien rights against the property. The subcontractor's lien remedy is independent of the contractual right to payment from the prime contractor; the lien attaches to the owner's property based on the labor or materials supplied. A subcontractor with a valid lien can foreclose against the property even if a pay-if-paid clause defeats the contractual claim against the prime contractor. Practical context For Texas subcontractors, the practical question is not whether to accept a pay-when-paid clause (almost universal in modern subcontracts) but how to structure it. Negotiation points: (1) require unambiguous timing-only language; (2) cap the maximum delay (e.g., "in no event later than 90 days from invoice"); (3) preserve lien rights; (4) carve out instances where prime contractor's breach causes the owner's non-payment; (5) preserve direct claims against the bond (on bonded projects) and against the owner (on unbonded projects). For prime contractors, the question is whether the marginal risk-shifting of pay-if-paid is worth the litigation risk and subcontractor pricing premium. Related Terms Construction Contract · Texas Prompt Payment Act · Mechanic's and Materialman's Lien · Retainage · Liquidated Damages Payment Stablecoin § 2025 A digital asset designed to maintain a stable value for use as a means of payment or settlement; under the GENIUS Act (2025), it may be issued only by permitted issuers holding one-to-one reserves. A payment stablecoin is a digital asset designed to hold a stable value, typically pegged one-to-one to the U.S. dollar, and used as a means of payment or settlement rather than as a speculative investment. The GENIUS Act, enacted in July 2025, created the first federal framework for payment stablecoins. It limits issuance to permitted payment stablecoin issuers, requires issuers to hold high-quality liquid reserves on a one-to-one basis, and treats issuers as financial institutions under the Bank Secrecy Act . Implementing rules from the OCC and other regulators continued to roll out through 2026. For a company building a stablecoin product, permitted-issuer status, reserve composition and attestation, redemption rights, and BSA/AML obligations are threshold design questions. The stablecoin framework is distinct from the broader crypto market-structure legislation that remained pending in Congress as of mid-2026. Authority GENIUS Act of 2025 (federal payment-stablecoin framework, enacted July 2025); 31 U.S.C. §§ 5311 et seq. (Bank Secrecy Act application to issuers). Perfection § The legal status by which a security interest becomes enforceable against third parties, competing creditors, transferees, and the debtor's bankruptcy trustee. Perfection establishes the secured party's place in the priority queue. Perfection is the legal status by which a security interest becomes enforceable against third parties, competing creditors, transferees, and the debtor's bankruptcy trustee. Without perfection, a security interest is enforceable against the debtor but vulnerable to defeat by intervening creditors and trustees. Perfection establishes the secured party's place in the priority queue. Authority Tex. Bus. & Com. Code §§ 9.308–9.316 : § 9.308 (when perfection occurs); § 9.310 (filing as method of perfection); § 9.312 (perfection by filing or possession for specific collateral types); § 9.313 (possession); § 9.314 (control); § 9.315 (continued perfection in proceeds and after sale or exchange). Methods of perfection Filing ( § 9.310 ): the default method, accomplished by filing a UCC-1 financing statement. Available for most types of collateral. Possession ( § 9.313 ): perfection by the secured party taking and retaining possession of tangible collateral. Available for goods, instruments, money, negotiable documents, certificated securities, and tangible chattel paper. Control ( § 9.314 ): perfection by the secured party obtaining "control", a defined term, over deposit accounts, investment property, letter-of-credit rights, and electronic chattel paper. The control mechanism varies by collateral type. Automatic perfection: certain narrow categories perfect automatically without filing or possession, most notably, purchase money security interests in consumer goods ( § 9.309(1) ). Continued perfection in proceeds (§ 9.315) A perfected security interest in collateral typically continues automatically into identifiable proceeds for a 20-day grace period; continued perfection beyond 20 days requires that proceeds be of a type to which the original financing statement applies, or that the secured party take additional perfection steps. Practical context Perfection is the moment that matters. Most secured-creditor losses in Texas commercial workouts and bankruptcies trace to perfection failures, debtor name errors on UCC-1 filings, lapsed continuations, failure to perfect against deposit accounts through control agreements, or failure to maintain perfection through name changes and reorganizations. Related Terms Security Interest · Financing Statement · Collateral Personal Jurisdiction § A court's authority over the parties to a lawsuit. Without personal jurisdiction over a defendant, a court cannot enter a binding judgment. Two-step analysis: does the long-arm statute authorize jurisdiction, and does exercising jurisdiction comport with constitutional due process? Personal jurisdiction is a court's authority over the parties to a lawsuit. Without personal jurisdiction over a defendant, a court cannot enter a binding judgment against that defendant. Personal jurisdiction analysis applies a two-step framework: (1) does a state's long-arm statute authorize jurisdiction, and (2) does exercising jurisdiction comport with constitutional due process under the Fourteenth Amendment? Authority Texas long-arm statute: Tex. Civ. Prac. & Rem. Code §§ 17.041–17.045 . U.S. Supreme Court framework: International Shoe Co. v. Washington , 326 U.S. 310 (1945); Daimler AG v. Bauman , 571 U.S. 117 (2014); Goodyear Dunlop Tires Operations v. Brown , 564 U.S. 915 (2011); Bristol-Myers Squibb v. Superior Court , 137 S. Ct. 1773 (2017); Ford Motor Co. v. Montana Eighth Judicial District , 141 S. Ct. 1017 (2021). Texas application: BMC Software Belgium, N.V. v. Marchand , 83 S.W.3d 789 (Tex. 2002). Texas long-arm statute Texas's long-arm statute extends jurisdiction over a non-resident who "does business" in Texas, with broad enumerated examples. The Texas Supreme Court has interpreted the statute to extend jurisdiction to the constitutional limits of due process, meaning the long-arm analysis collapses into the constitutional analysis. Two forms of personal jurisdiction General jurisdiction: the court has jurisdiction over the defendant for any claim, regardless of where the claim arose. Under Daimler and Goodyear , general jurisdiction over a corporation exists only where the corporation is "essentially at home", typically the state of incorporation and the state of principal place of business. General jurisdiction over Texas-incorporated corporations and corporations with their principal place of business in Texas is automatic. Specific jurisdiction: the court has jurisdiction over claims arising from or related to the defendant's contacts with the forum state. Bristol-Myers Squibb (2017) clarified that specific jurisdiction requires a connection between the defendant's forum contacts and the specific claims at issue. Ford Motor (2021) softened that requirement somewhat, holding that specific jurisdiction may exist where the defendant has substantial forum activities related to the type of claim asserted, even without strict claim-by-claim nexus. Minimum contacts test Specific jurisdiction requires (1) purposeful availment by the defendant of the privilege of conducting activities in the forum; (2) a connection between the forum contacts and the litigation; (3) that exercising jurisdiction comports with traditional notions of fair play and substantial justice. Consent and waiver Personal jurisdiction is waivable. Defendants who fail to timely raise the defense (typically in their first responsive pleading) waive it. Forum selection clauses in commercial contracts effectively consent to personal jurisdiction in the chosen forum. Practical context Personal jurisdiction is the most-litigated procedural issue in cross-state commercial disputes. Texas businesses sued out-of-state can frequently challenge jurisdiction successfully if their forum contacts are limited. Conversely, out-of-state defendants in Texas litigation should evaluate personal-jurisdiction defenses before filing any responsive pleading that could waive them. Related Terms Subject Matter Jurisdiction · Venue · Removal · Choice of Law / Choice of Forum Petition / Complaint § The initial pleading filed by a plaintiff to commence a lawsuit. The petition (Texas) or complaint (federal) states the parties, the court's jurisdiction, the factual and legal basis for the claim, and the relief sought. Texas pleading standards differ meaningfully from federal Twombly/Iqbal plausibility. The petition (in Texas state court terminology) or complaint (in federal court terminology) is the initial pleading filed by a plaintiff to commence a lawsuit. The petition states the parties, the court's jurisdiction, the factual and legal basis for the claim, and the relief sought. Texas pleading standards differ meaningfully from federal pleading standards under Twombly / Iqbal . Authority Tex. R. Civ. P. 47 (claims for relief, Texas pleading standard); Tex. R. Civ. P. 45 (form of pleadings); Tex. R. Civ. P. 78 (pleadings of parties). Federal: Fed. R. Civ. P. 8(a) (claim for relief); Bell Atlantic Corp. v. Twombly , 550 U.S. 544 (2007); Ashcroft v. Iqbal , 556 U.S. 662 (2009). Texas pleading standard Under TRCP 47 , a petition must contain (1) a short statement of the cause of action sufficient to give fair notice; (2) a statement that the damages sought are within the court's jurisdictional limits; (3) a demand for judgment for the relief sought; and (4) a discovery-level designation under TRCP 190 . Texas uses a "fair notice" pleading standard, significantly more permissive than federal Twombly / Iqbal plausibility standard. Federal pleading standard Under Twombly / Iqbal , federal complaints must contain "enough facts to state a claim to relief that is plausible on its face." Conclusory allegations and threadbare recitals of the elements of a claim are insufficient. This is a meaningfully higher bar than Texas's fair-notice standard. Specific pleading requirements Some claims require heightened specificity: fraud ( TRCP 50; Fed. R. Civ. P. 9(b) ) requires particularity; conditions precedent must be pleaded; jurisdictional allegations must be specific. Practical context The pleading standard difference is consequential, claims that survive motion to dismiss in Texas state court may be dismissed in federal court for lack of plausibility. Plaintiffs who file in Texas state court should consider whether removal is likely and draft accordingly. Related Terms Answer · Motion to Dismiss · Texas Rules of Civil Procedure · Removal Phantom Income § Taxable income allocated to a pass-through entity owner that exceeds the cash distributed to that owner, creating tax liability without corresponding cash to pay the tax. Most commonly arises in partnerships, LLCs, and S-corporations with retained earnings, debt-financed operations, or owner-level business expenses paid by the entity. Phantom income is taxable income allocated to the owner of a pass-through entity that exceeds the cash distributed to that owner during the year. The owner owes federal income tax on the full allocated share but lacks corresponding cash to pay the tax. Phantom income is the principal financial pain point of pass-through ownership, especially in growing or capital-intensive businesses that retain earnings to fund operations. Authority Allocation rules for partnerships and LLCs: 26 U.S.C. §§ 702-704 ; substantial economic effect: 26 C.F.R. § 1.704-1(b)(2) . S-corporation pro rata allocation: 26 U.S.C. § 1366 . Estimated tax obligation regardless of distribution: 26 U.S.C. § 6654 . Texas operating agreements typically address phantom income through tax-distribution provisions consistent with Tex. Bus. Orgs. Code § 101.054 (LLC operating agreement governs). Common phantom-income scenarios Phantom income most frequently arises in: (1) retained earnings , the entity earns and retains cash for working capital or capital expenditures rather than distributing to owners; (2) debt principal payments , cash used to pay down debt is not deductible but reduces distributable cash; (3) asset sale gains , gain on sale of assets is allocated to owners but proceeds may be reinvested or used to repay debt; (4) capitalized expenditures , cash spent on long-lived assets is capitalized rather than deducted; (5) cancellation of debt income , debt forgiveness creates taxable income without corresponding cash; (6) reasonable compensation requirements for S-corp shareholder-employees that limit cash flexibility. Year-end disparity The mismatch is particularly acute when entity income surges late in the year (e.g., from a year-end contract win or asset sale) or when owners expected losses but the entity ended profitable. The K-1 received in March or April reveals tax liability the owner had no opportunity to plan for, often well after estimated-tax safe-harbor opportunities have closed. The tax-distribution remedy Standard remediation for phantom-income exposure is a tax-distribution provision in the operating agreement: a mandatory pro rata cash distribution to owners each quarter or year sufficient to cover the estimated tax on each owner's allocated share. Tax distributions are typically calculated at an "assumed tax rate", often 40% or the highest applicable individual rate including state and federal, applied to the owner's K-1 allocated income, paid in advance of estimated-tax due dates. See Tax Distribution Provision . Capital account and basis impact Phantom income increases the owner's capital account and tax basis in the entity, even though no cash was distributed. This basis increase reduces the gain (or increases the loss) the owner will recognize on a subsequent sale of the interest. Phantom income is therefore not "extra" tax, it is acceleration of tax that would otherwise have been deferred to a sale or liquidation event. The cash-flow problem is real; the long-run tax position is largely the same. Practical context For Texas pass-through owners, the phantom-income surprise is one of the most common reasons clients call their attorney in tax season. The structural prevention is a well-drafted tax-distribution provision in the partnership/LLC agreement. The reactive remediation is to (1) recalculate estimated-tax safe harbor using current-year actuals; (2) use the Annualized Income Installment Method on Form 2210 to limit underpayment penalties; (3) negotiate a discretionary distribution from the entity if cash permits; (4) document the phantom-income exposure in the K-1 file for future tax planning. Companion article: Business Divorces in Texas Related Terms Tax Distribution Provision · Pass-Through Entity · Schedule K-1 · Estimated Tax Payments · Distribution Plan of Reorganization § The central document in a Chapter 11 bankruptcy case, proposing how the debtor will reorganize debts, restructure operations, and emerge from bankruptcy. Classifies claims and equity interests, specifies treatment of each class, and provides for ongoing operations. Subject to creditor voting (impaired classes) and court confirmation under 11 U.S.C. § 1129. Includes disclosure statement (§ 1125) describing plan in adequate detail for creditor vote. Confirmation discharges pre-petition debts to extent provided. The Plan of Reorganization is the central document in a Chapter 11 bankruptcy case, proposing how the debtor will reorganize debts, restructure operations, and emerge from bankruptcy. The plan classifies claims and equity interests, specifies treatment of each class, and provides for ongoing operations post-confirmation. Plans are subject to creditor voting (for impaired classes) and court confirmation under § 1129. Plan confirmation discharges pre-petition debts to extent provided in the plan, allowing the reorganized debtor to emerge with restructured obligations. Authority Federal statute: 11 U.S.C. § 1123 (plan contents); § 1124 (impairment); § 1125 (disclosure statement); § 1126 (acceptance/voting); § 1129 (confirmation). Subchapter V plans: § 1190 et seq. Foundational cases: Bank of America Nat'l Trust v. 203 N. LaSalle St. P'ship , 526 U.S. 434 (1999) (absolute priority and new value); Czyzewski v. Jevic Holding Corp. , 580 U.S. 451 (2017) (priority skipping in structured dismissals). Required plan contents, § 1123 Section 1123 requires plans to: (1) designate classes of claims and interests ; (2) specify any classes that are unimpaired ; (3) specify treatment of each impaired class ; (4) provide same treatment within class (unless holder agrees otherwise); (5) provide adequate means for plan implementation ; (6) address charter provisions and equity issuance ; (7) include other provisions consistent with Bankruptcy Code. Plans typically run 50-150 pages with substantial detail on each class treatment. Classification Plans classify claims and interests by similar legal character. Standard classes: (1) secured claims , typically separate class per secured creditor; (2) priority claims , wage claims, tax claims; (3) general unsecured , typically one class; large general unsecured may be subdivided; (4) convenience class , small claims paid in full; (5) subordinated claims ; (6) equity interests , typically separate classes for preferred and common. Classification affects voting and confirmation; gerrymandering classification to manipulate voting is closely scrutinized. Disclosure statement, § 1125 Section 1125 requires disclosure statement providing "adequate information" for creditors to make informed plan vote. Standard contents: (1) business description ; (2) events leading to bankruptcy ; (3) plan terms , class treatments, timing, distributions; (4) liquidation analysis , comparing plan to Chapter 7 liquidation; (5) financial projections ; (6) risk factors ; (7) tax consequences ; (8) voting procedures . Court approval of disclosure statement is required before plan voting begins. Disclosure statement hearing is significant pre-confirmation event. Voting, § 1126 Plan voting mechanics: (1) impaired classes vote ; unimpaired classes presumed to accept; (2) creditor class acceptance , class accepts if approved by 2/3 in amount AND more than 1/2 in number of voting creditors; (3) equity class acceptance , 2/3 in amount of voting interests; (4) insider votes excluded from majority calculation. Voting tabulation typically conducted by claims agent or trustee. Voting outcomes determine whether confirmation requires cramdown or proceeds with consent. Confirmation requirements, § 1129 Section 1129(a) confirmation requires (16 specific findings): (1) plan complies with Code; (2) proponent complies with Code; (3) good faith proposal; (4) payments approved by court reasonable; (5) governance disclosure; (6) regulatory approvals; (7) best interests test (each creditor receives at least Chapter 7 amount); (8) acceptance by all impaired classes OR cramdown under § 1129(b); (9) priority claims paid in full or treated per § 1129(a)(9); (10) at least one impaired class consents; (11) feasibility, plan likely to succeed; (12) US Trustee fees paid; (13)-(16) various technical requirements. Cramdown under § 1129(b) permits confirmation over dissenting class with "fair and equitable" treatment. Effect of confirmation Plan confirmation has substantial effects: (1) discharge , pre-petition debts discharged to extent provided; (2) binding , all parties bound by plan terms whether or not they voted; (3) vesting of property , property vests in reorganized debtor free of liens (except as provided); (4) injunction , against acts inconsistent with plan; (5) res judicata , preclusive effect on issues addressed in plan; (6) discharge stay , § 524 permanent injunction against discharged claims. Confirmed plan substitutes for the debtor's pre-petition contracts and obligations. Pre-packaged and pre-arranged plans Increasingly common Chapter 11 strategies: (1) pre-packaged plan , plan negotiated and accepted by major creditors before petition filing; voting completed pre-petition; rapid confirmation post-petition (often 30-45 days); (2) pre-arranged plan , substantial creditor support negotiated pre-petition without completed voting; rapid plan filing post-petition. Both reduce Chapter 11 cost and uncertainty substantially. Used heavily in larger restructurings to manage timeline and cost. Practical context For Texas Chapter 11 cases, plan strategy drives the entire reorganization. Best practice: (1) develop plan thesis pre-petition where possible; (2) negotiate with major creditors pre-petition (pre-packaged or pre-arranged); (3) coordinate disclosure statement with plan, major confirmation issue; (4) classify carefully, gerrymandering invites objections; (5) prepare for cramdown if dissenting classes likely; (6) manage exclusivity period strategically; (7) coordinate with DIP financing milestones. For creditors: (1) review classification carefully, appropriate class affects treatment; (2) evaluate plan vs. liquidation analysis; (3) participate in plan negotiations through committee; (4) preserve voting rights through proper claim filing. Related Terms Chapter 11 · Debtor-in-Possession · Section 363 Sale · Automatic Stay · Priority Post-Judgment Interest § Interest that accrues on a money judgment from the date of entry until the judgment is fully satisfied. Texas post-judgment interest is governed by Tex. Fin. Code Ch. 304. The current rate is the lesser of (a) prime rate as published by the Federal Reserve, with a 5% floor and 15% ceiling, or (b) any rate specified in the underlying contract. The Texas Office of Consumer Credit Commissioner publishes the applicable rate. Post-judgment interest is interest that accrues on a money judgment from the date of entry until the judgment is fully satisfied. Post-judgment interest serves two functions: (1) compensating the prevailing party for the time value of money during the pendency of appeal and collection efforts; and (2) providing economic incentive for prompt satisfaction of judgments. Texas post-judgment interest is governed by Chapter 304 of the Texas Finance Code, with a rate framework keyed to the federal prime rate. Authority Texas post-judgment interest framework: Tex. Fin. Code Ch. 304 : § 304.003 (judgment interest rate); § 304.005 (accrual of post-judgment interest); § 304.006 (compounding); § 304.007 (rate after expiration of unmodified judgment). Rate publication: Texas Office of Consumer Credit Commissioner (OCCC), publishing the post-judgment interest rate quarterly. Pre-judgment interest framework (different rules): Tex. Fin. Code Ch. 304, Subch. B ; Johnson & Higgins of Texas, Inc. v. Kenneco Energy, Inc. , 962 S.W.2d 507 (Tex. 1998). The rate framework Section 304.003 establishes the post-judgment interest rate as the lesser of: (1) the prime rate published by the Federal Reserve as of the date of the judgment, OR (2) any rate specified in the contract that is the basis of the action. The rate is subject to a 5% floor and a 15% ceiling, the rate cannot be lower than 5% or higher than 15% regardless of the underlying market rate. The OCCC publishes the applicable rate quarterly in the Texas Credit Letter. As of recent quarters with prime rates in the 7-8% range, the post-judgment rate has typically tracked the prime rate within the floor/ceiling boundaries. Contractually specified rates Where the contract specifies a rate that is below the prime rate (e.g., a 4% commercial loan), the contract rate controls, but the rate cannot be lower than 5% (the statutory floor). Where the contract specifies a rate higher than prime (e.g., a 12% mezzanine note), the prime rate controls, the contract rate is capped by the prime/15% lesser of analysis. Default rates and prepayment penalties in the underlying contract typically do not increase the post-judgment rate above the statutory framework. Accrual and compounding Post-judgment interest accrues from the date the judgment is rendered (Section 304.005). Interest is computed on the unpaid principal of the judgment plus the unpaid pre-judgment interest. Section 304.006 provides that post-judgment interest compounds annually. The judgment continues to accrue post-judgment interest at the original rate even if the prime rate changes after entry, the rate is fixed at the time of judgment. Pre-judgment vs. post-judgment interest Pre-judgment interest (interest from the date of breach or accrual to the date of judgment) operates under different rules. For statutory and common-law claims, pre-judgment interest typically equals the post-judgment rate but accrues only from a specified starting point, typically 180 days after written notice of claim, or the date the claim is filed (whichever is earlier), under Johnson & Higgins . For contractual claims with a specified pre-judgment interest rate, the contract rate governs subject to usury limits. Pre-judgment interest is added to the principal amount of damages to determine the judgment amount on which post-judgment interest will accrue. Federal vs. state judgments Federal court judgments in diversity cases use federal post-judgment interest under 28 U.S.C. § 1961 , typically a substantially lower rate than Texas state court (federal post-judgment interest is the weekly average 1-year constant-maturity Treasury yield, often 1-5%). Federal court judgments in federal-question cases also use § 1961. Federal judgments enforced in Texas state court continue to accrue at the federal rate, not the state rate. Practical impact For multi-million-dollar judgments pending on appeal, post-judgment interest accumulation is substantial: a $5 million judgment at 8.5% accrues approximately $425K per year in interest. Over a typical 12-18 month appeal cycle, the additional interest can be $500K-$650K. This drives both (a) the appellant's incentive to expedite appeal or post supersedeas bond to delay execution; and (b) the appellee's incentive to resist supersedeas relief. Settlements during pendency of appeal typically include negotiation over the interest component. Practical context For Texas commercial litigants, post-judgment interest is a meaningful component of judgment value but rarely a strategic driver. Best practice: (1) confirm the applicable rate at the time of judgment by reference to the OCCC's published rate; (2) draft the judgment to specify the rate, accrual date, and compounding schedule clearly; (3) for prevailing parties facing appeal, calculate the expected additional interest as a settlement-negotiation factor; (4) for losing parties contemplating appeal, evaluate whether the appeal value justifies the interest cost; (5) for federal-court matters, distinguish § 1961 federal rates from Texas state rates. Disputes over post-judgment interest are infrequent because the framework is mechanical, but rate calculations on judgments entered during rate transitions can require careful analysis. Related Terms Supersedeas Bond · Garnishment · Turnover Order · Usury Preferred Stock § An equity class with rights and preferences senior to common stock, typically including liquidation preference, dividend preferences, anti-dilution protection, voting rights, conversion rights, and protective provisions. The standard security type for venture capital and growth equity investments. Each "series" (Seed, Series A, B, C) typically has its own preferred class with negotiated terms reflecting investor leverage at that stage. Preferred Stock is an equity class with rights and preferences senior to common stock. Standard preferred stock features: liquidation preference (senior payout in exit), dividend preferences (typically 6-8% noncumulative), anti-dilution protection, voting rights, conversion rights to common, and protective provisions (consent rights over key actions). Preferred stock is the standard security type for venture capital and growth equity investments, VCs almost universally invest in preferred rather than common stock to obtain the protective provisions. Each round of investment typically issues a new "series" (Seed Preferred, Series A Preferred, Series B Preferred, etc.) with its own negotiated terms. Authority State law: governed by corporate law of state of incorporation. Texas: Tex. Bus. Orgs. Code §§ 21.151-21.158 (classes and series of shares); §§ 21.221-21.225 (rights of shareholders). Delaware (most common state of incorporation for VC-backed companies): Del. Code Title 8 §§ 151-152. Standard documents: National Venture Capital Association (NVCA) model financing documents, widely used template for Series A and later financings. Liquidation preference The most economically important preferred stock right. Liquidation preference provides preferred holders with priority payout in liquidation, sale, or other change of control: (1) 1x non-participating , preferred receives investment back, then participates in remaining proceeds only on as-converted basis; (2) 1x participating , preferred receives investment back PLUS participates in remaining proceeds on as-converted basis (double-dipping); (3) capped participating , participating but capped at 2-3x return; (4) multiple liquidation preferences (2x, 3x), receives multiple times investment before common participates. Most VC deals use 1x non-participating; participating preferred is sometimes used in stressed deals or down rounds. Dividend preferences Standard preferred stock includes dividend preference: (1) noncumulative , dividend rate (typically 6-8%) but only payable if declared; most common; (2) cumulative , dividends accrue regardless of declaration; payable on liquidation or conversion; (3) PIK (paid in kind) , dividends paid in additional shares rather than cash. Dividends are economically meaningful only on liquidation/exit, most VC-backed companies don't pay dividends on operating basis. Cumulative dividends increase liquidation preference over time, increasing pressure for liquidity events. Anti-dilution protection Anti-dilution provisions adjust preferred stock conversion price downward in subsequent financings at lower valuations (down rounds): (1) full ratchet , conversion price reset to lowest subsequent issue price; investor-favorable; rare in standard deals; (2) broad-based weighted average , most common; adjusts conversion price using weighted-average formula; balances investor protection and founder dilution; (3) narrow-based weighted average , between broad-based and full ratchet. The formula adjusts on each down-round issuance; sophisticated cap table modeling required to track impact. Voting rights Preferred stock voting structures: (1) vote with common , preferred votes on as-converted basis on standard matters; most common; (2) separate class voting , specific matters require separate preferred class consent (protective provisions); (3) directors , preferred typically appoints specified number of board members; (4) consent rights , specific consent thresholds for major decisions. Voting rights and consent rights are heavily negotiated and create the practical governance framework for VC-backed companies. Protective provisions Protective provisions require preferred stockholder consent for specified corporate actions, regardless of common stockholder approval: (1) amendments to charter affecting preferred rights; (2) creation of senior or pari passu securities ; (3) change of control ; (4) liquidation, dissolution, winding up ; (5) repurchases of common stock ; (6) declaration of dividends ; (7) increase in board size ; (8) incurring substantial debt ; (9) changing primary business ; (10) incurring capital expenditures above threshold . Protective provisions provide preferred stockholders veto power over major decisions; the specific list varies by deal stage and investor leverage. Conversion rights Preferred stock typically converts to common stock: (1) at investor option , voluntary conversion; (2) automatic on IPO , typically with minimum offering size and price thresholds; (3) automatic on majority preferred consent . Conversion ratio starts 1:1 but adjusts via anti-dilution and stock splits. Voluntary conversion is rare except for specific tax/restructuring purposes; automatic conversion on IPO is the typical exit path for preferred holders. Other rights Common additional preferred rights: (1) pro rata rights , right to participate in subsequent rounds proportionate to ownership; (2) information rights , financial statements, board observer rights; (3) registration rights , demand and piggyback rights for IPO registration; (4) right of first refusal/co-sale on common stockholder transfers; (5) drag-along rights , to compel common stockholders in qualifying sale; (6) redemption rights , typically on or after specific anniversary at investor option; rare in current market. Series structure and "stacking" Each financing round typically creates a new preferred series (Seed, Series A, Series B, etc.) with its own terms and liquidation preference seniority. Standard structure: most-recent series senior to earlier series. "Stacking" of preferences means: (1) Series C investors get paid first up to their preference; (2) then Series B up to their preference; (3) then Series A up to theirs; (4) then common holders share the remainder. Liquidation preference stacking can substantially reduce common stockholder proceeds in moderate-exit scenarios, founders should model carefully. Practical context For Texas startups raising venture capital, preferred stock terms are central to investor negotiations. Best practice: (1) use NVCA model documents as starting point, saves negotiation cost and provides market-standard framework; (2) negotiate liquidation preference structure carefully, 1x non-participating is market for most rounds; participating preferred or multiple preferences signal stressed deal; (3) understand protective provisions practical implications, they're operational governance, not just legal terms; (4) model dilution and exit scenarios under various preference structures; (5) coordinate preferred terms with founder vesting, option pool, and other governance structures. For investors: (1) understand each preferred right's economic value; (2) negotiate within market parameters, overreaching on terms creates founder friction; (3) coordinate preferred terms with portfolio strategy; (4) evaluate exit scenarios under preferred structures. Common pitfall: founders not modeling exit scenarios under preferred preferences, discovering at exit that common stockholders receive substantially less than expected after preferred liquidation preferences are satisfied. Sophisticated cap table modeling is essential. Related Terms SAFE · Convertible Note · Regulation D · Term Sheet · Shareholder Priority § The relative ranking of competing claims to the same collateral or asset, determining the order in which creditors are paid from proceeds. Under Tex. Bus. & Com. Code § 9.322, priority among perfected security interests is generally first-to-file or first-to-perfect, with substantial exceptions for purchase-money security interests, special collateral types, and statutory liens. Priority is the relative ranking of competing claims to the same collateral or asset, determining the order in which creditors are paid from proceeds when the collateral is sold or distributed. In secured-transaction practice, priority disputes are decided primarily under UCC Article 9, supplemented by special rules for purchase-money security interests, particular types of collateral, statutory liens, and intercreditor agreements. Priority is the defining concept of secured lending: an unperfected security interest is junior to almost everything; a properly perfected first-priority security interest is senior to almost everything except specifically prioritized claims. Authority UCC priority framework: Tex. Bus. & Com. Code §§ 9.317-9.339 . Default rule (first-to-file or first-to-perfect): § 9.322 . Purchase-money security interests: §§ 9.324, 9.324A . Priority among conflicting security interests in different types of collateral: §§ 9.328-9.336 . Subordination by agreement: § 9.339 . Buyer-in-ordinary-course rule: § 9.320 . Lien creditor priority: § 9.317 . Real property liens, different framework under Tex. Prop. Code Ch. 53 (mechanic's liens) and recordation rules under Tex. Prop. Code § 13.001 . The first-to-file-or-perfect rule The default UCC priority rule under § 9.322 is first-to-file-or-perfect: among conflicting perfected security interests, priority is determined by the earliest of (1) filing of a financing statement covering the collateral or (2) other perfection (possession, control, automatic perfection). The party that achieves perfection first wins, even if their security interest attached later. This makes early UCC-1 filing critical, many commercial lenders file financing statements at or before loan closing, sometimes pre-filing before the security agreement is signed (permissible under § 9.502(d) with debtor authorization). Purchase-money security interest priority A purchase-money security interest (PMSI), a security interest taken to enable the debtor to acquire the specific collateral, has special priority rules. Under § 9.324, a PMSI in goods (other than inventory and livestock) is senior to a conflicting non-PMSI security interest, even one perfected earlier, provided the PMSI is perfected within 20 days of debtor's possession of the collateral. PMSI in inventory has different requirements (notice to prior secured parties, perfection before delivery). The PMSI exception allows equipment vendors, financing companies, and floor-plan lenders to take priority over the borrower's general bank lender for the specific equipment they finance. Priority by collateral type Different collateral types have different priority rules: (1) deposit accounts , priority by control under § 9.327 (the bank where the account is maintained always has priority unless it subordinates); (2) investment property , priority by control under § 9.328; (3) letter-of-credit rights , control under § 9.329; (4) chattel paper , special rules under § 9.330 favoring possession; (5) fixtures , § 9.334 governs priority between secured parties and real-property mortgagees, with special priority for fixture filings recorded in the real-property records. Priority of lien creditors and bankruptcy trustees Under § 9.317, an unperfected security interest is subordinate to (1) lien creditors who become such before perfection; (2) buyers of goods, accounts, instruments, and chattel paper who give value before perfection without knowledge of the security interest. The "lien creditor" category includes bankruptcy trustees under 11 U.S.C. § 544(a) . This is the principal reason perfection matters: an unperfected security interest is essentially worthless against a bankruptcy trustee. Filing before bankruptcy is the most common method of avoiding lien-creditor priority loss. Subordination by agreement Section 9.339 expressly authorizes subordination of priority by agreement. A senior creditor may subordinate its priority to a junior creditor by intercreditor agreement; the subordination is effective without consent of the debtor (though the debtor's acknowledgment is often obtained). Bankruptcy enforces such subordination under 11 U.S.C. § 510(a) . Subordination agreements are the principal tool used to reorder priority for commercial reasons (e.g., for new financing during a workout). Real property priority Real property liens follow a different priority framework under Texas Property Code: priority is generally determined by recordation date under § 13.001, with mechanic's liens following Chapter 53's special framework that gives perfected mechanic's liens priority back to commencement of construction or first delivery of materials. Federal tax liens have separate priority rules under 26 U.S.C. § 6323 . Lien priority on real property is the principal concern of title insurance, Schedule B exceptions in title commitments document existing liens that take priority over the buyer's anticipated mortgage. Practical context For Texas commercial lenders and counsel, priority is the central technical concern in secured lending. Best practice: (1) file UCC-1 promptly upon authorization, often pre-closing; (2) check existing UCC filings against the debtor by exact legal name (small variations can defeat priority); (3) calendar continuation statements (UCC-1 must be continued every 5 years under § 9.515); (4) for real-property collateral, ensure deed of trust recordation in proper county; (5) for fixture filings, ensure both UCC and real-property recordation; (6) for PMSI structures, file within 20 days of debtor possession; (7) for control-based collateral, ensure proper control agreements with the depository or intermediary. For borrowers, priority disputes often arise during financings, the new lender's diligence reveals existing UCC filings that the borrower had forgotten or thought released, requiring termination statements to clear the way. Related Terms Perfection · Security Interest · Financing Statement · Attachment · Intercreditor Agreement · Mechanic's and Materialman's Lien Private Placement Memorandum (PPM) § A disclosure document used in private securities offerings, providing investors with information about the issuer, securities offered, business, financial condition, risk factors, management, and use of proceeds. Required when non-accredited investors participate in Rule 506(b) offerings. Best practice for all private offerings to support anti-fraud defenses under Rule 10b-5 even when not strictly required. Typical length: 30-100+ pages. A Private Placement Memorandum (PPM), also called Offering Memorandum or Confidential Information Memorandum, is a disclosure document used in private securities offerings. The PPM provides investors with information about the issuer, the securities offered, business operations, financial condition, risk factors, management, and use of proceeds. While Reg D does not require a PPM for accredited-only offerings, PPMs are standard in most private placements: they're required when non-accredited investors participate in Rule 506(b) offerings, and they're best practice for all offerings to support anti-fraud defenses under Rule 10b-5. Authority Disclosure requirements: 17 C.F.R. § 230.502(b) (Reg D Rule 502(b), disclosure required for Rule 506(b) offerings with non-accredited investors). Anti-fraud framework: 15 U.S.C. § 77q (Securities Act § 17(a)); 15 U.S.C. § 78j(b) (Securities Exchange Act § 10(b)); 17 C.F.R. § 240.10b-5 (Rule 10b-5). Foundational case: Basic Inc. v. Levinson , 485 U.S. 224 (1988) (materiality standard). When PPM is required PPM (or equivalent disclosure document) is required: (1) Rule 506(b) with non-accredited investors ; (2) Regulation A+ Tier 2 offerings , Form 1-A offering circular; (3) Reg CF crowdfunding , Form C disclosure; (4) Rule 504 offerings in some states. PPM is NOT strictly required for: Rule 506(b) accredited-only; Rule 506(c); private Rule 4(a)(2) offerings to sophisticated investors. Best practice: prepare PPM for all material private offerings to support anti-fraud defenses. Standard PPM contents Comprehensive PPM typically includes: (1) cover page , issuer, offering size, security type, distribution restrictions; (2) summary ; (3) risk factors , comprehensive list of investment risks; (4) use of proceeds ; (5) terms of offering , security description, pricing, minimums, closing mechanics; (6) business description , operations, products, markets, competition, strategy; (7) management , directors, officers, compensation; (8) principal owners , pre-offering and pro forma cap table; (9) financial statements ; (10) tax considerations ; (11) legal proceedings ; (12) related-party transactions ; (13) subscription procedures ; (14) investor representations and questionnaire . The anti-fraud defense function Even when not strictly required, PPMs serve a critical anti-fraud defense function. Rule 10b-5 prohibits material misrepresentations and omissions in connection with securities transactions. A comprehensive PPM provides: (1) contemporaneous record of disclosed information; (2) defense to omission claims , comprehensive risk factors and disclosures; (3) investor sophistication evidence , investors received and reviewed extensive disclosure; (4) integration with subscription documents , investor representations referencing PPM. Many securities lawsuits turn on whether material information was adequately disclosed; PPMs are the principal record. Risk factors section The risk factors section is typically the most important PPM component for anti-fraud defense purposes. Standard risk factor categories: (1) business risks , competition, market conditions, operational dependencies; (2) industry risks , sector-specific exposures; (3) financial risks , capital needs, cash flow, debt; (4) management risks , key person dependence, succession; (5) regulatory risks ; (6) technology risks ; (7) investment-specific risks , illiquidity, dilution, security-specific terms; (8) tax risks ; (9) conflicts of interest . Risk factors should be specific to the issuer, not boilerplate. Subscription documents PPMs are typically packaged with subscription documents: (1) subscription agreement , investor's commitment to purchase; (2) investor questionnaire , accredited status, sophistication, suitability; (3) investor representations , investment intent, residence, disclosure receipt, due diligence opportunity. The integrated package documents both the offering and the investor's qualification, providing comprehensive defense documentation. Updates and amendments Material changes during the offering require PPM updates: (1) supplements , amendments addressing specific changes; (2) complete restatement for substantial changes; (3) investor consent may be required to ratify subscriptions on updated terms. Failure to update can create rescission rights for investors and material misrepresentation exposure for issuer. Practical context For Texas issuers, PPM preparation is significant investment but provides substantial protection. Best practice: (1) engage securities counsel for material offerings, PPM drafting requires legal expertise; (2) tailor risk factors to specific issuer and offering, boilerplate is inadequate; (3) coordinate PPM with subscription agreement and investor questionnaire; (4) update for material changes during offering; (5) maintain documentation of investor receipt and review; (6) for ongoing offerings, refresh disclosures periodically; (7) integrate with cap table, financial statements, and other supporting documentation. For investors: (1) review PPM thoroughly before investing, particularly risk factors; (2) request additional information if PPM is inadequate; (3) document review and questions; (4) preserve PPM as primary disclosure record. Common pitfall: issuers using boilerplate or template PPMs without customization, generic risk factors and missing issuer-specific disclosures defeat the anti-fraud defense purpose. Related Terms Regulation D · Accredited Investor · Form D · Texas Securities Act Promissory Estoppel § An equitable doctrine that enforces a promise, even one not supported by traditional consideration, where the promisee has reasonably relied on the promise to its detriment. Texas requires (1) a promise; (2) the promisee's reasonable reliance; (3) substantial detrimental change in position; and (4) injustice avoidable only by enforcement. Traditionally a sword for plaintiffs and a shield against statute-of-frauds defenses, promissory estoppel is narrower than full contract enforcement. Promissory estoppel is an equitable doctrine that enforces a promise, even one not supported by traditional consideration, where the promisee has reasonably relied on the promise to its detriment. The doctrine fills gaps where formal contract requirements (consideration, statute of frauds compliance, mutual assent) are not satisfied but enforcement is necessary to prevent injustice. Texas applies a four-element framework, with promissory estoppel functioning both as a freestanding cause of action and as a defense against statute-of-frauds claims. Authority Foundational Texas case: Wheeler v. White , 398 S.W.2d 93 (Tex. 1965) (adopting promissory estoppel as cause of action). Modern framework: "Moore" Burger, Inc. v. Phillips Petroleum Co. , 492 S.W.2d 934 (Tex. 1972). Statute-of-frauds defense application: "Moore" Burger ; Frost Crushed Stone Co. v. Odell Geer Constr. Co. , 110 S.W.3d 41 (Tex. App.-Waco 2002, no pet.). Restatement framework: Restatement (Second) of Contracts § 90 . Damages limitation: Sonnichsen v. Baylor Univ. , 47 S.W.3d 122 (Tex. App.-Waco 2001, no pet.) (recovery limited to reliance damages, not benefit-of-the-bargain). The four-element framework Texas applies a four-element test for promissory estoppel: (1) a promise , sufficiently definite to be capable of being relied upon; (2) foreseeability , that the promisee would rely; (3) actual and reasonable reliance , the promisee in fact relied to its detriment; and (4) injustice avoidable only by enforcement of the promise. The fourth element imports equitable judgment, courts balance the promisor's interests, the promisee's reliance investment, and the relative justice of enforcement vs. non-enforcement. Promissory estoppel as cause of action Promissory estoppel functions as a stand-alone cause of action when the parties never formed a binding contract but the promisee detrimentally relied. Common scenarios: (1) employment offers , employee accepts offer, relocates, then employer withdraws; (2) charitable pledges , donee organization plans on the gift, donor reneges; (3) investment commitments , promisor commits funding, promisee invests in development, commitment is withdrawn; (4) preliminary agreements , parties exchange letters of intent or term sheets, one side proceeds, the other backs out. Recovery is typically limited to reliance damages, out-of-pocket losses incurred in reliance, rather than expectation damages (benefit of the bargain). Statute-of-frauds defense application Promissory estoppel can defeat a statute-of-frauds defense in some circumstances. The doctrine has narrow scope here: the promise must include an agreement to put the matter in writing or to satisfy the statute. "Moore" Burger (Tex. 1972) is the controlling case, promissory estoppel can overcome statute of frauds where the promisor has assured the promisee that the agreement will be put in writing and the promisee has relied on that assurance. General promissory-estoppel claims that simply assert reliance on an oral promise without a corresponding promise to memorialize do not defeat the statute of frauds. Reliance vs. expectation damages Texas damages for promissory estoppel are generally limited to reliance damages (the promisee's out-of-pocket losses in reliance on the promise) rather than expectation damages (the value of the promise as if performed). The rationale: promissory estoppel is an equitable doctrine aimed at preventing detrimental reliance, not enforcing the underlying promise as a contract. A plaintiff who would have benefited substantially from the promised performance recovers only what was lost in reliance, not what was lost in unrealized benefit. Some courts have departed from this in compelling cases, but reliance damages remain the standard. Distinction from quantum meruit Promissory estoppel and quantum meruit are both equitable doctrines but address different fact patterns: (1) promissory estoppel , based on a promise; recovery is for damages arising from reliance; (2) quantum meruit , based on services rendered or benefits conferred; recovery is for the reasonable value of the services. Both are pleaded as alternatives in many cases where formal contract is unavailable. See Quantum Meruit . Common pleading patterns Modern Texas commercial pleadings often include promissory estoppel as an alternative theory to breach of contract: "Plaintiff and Defendant entered into a contract... Alternatively, Defendant made a promise upon which Plaintiff reasonably relied to its detriment, and injustice can be avoided only by enforcement of that promise." This protective pleading captures promissory-estoppel relief if formal contract requirements (consideration, mutual assent, statute of frauds) are not satisfied. Carefully pleaded alternative theories permit the case to survive if any theory succeeds. Practical context For Texas commercial parties, promissory estoppel is most valuable as: (1) a fallback theory when formal contract is uncertain; (2) a means to recover reliance investment when the other party reneges before contract finalization; (3) a defensive tool for promisees who relied on representations made during pre-contract negotiations; (4) a narrow statute-of-frauds workaround. Limitations: (1) recovery is limited to reliance damages, not expectation; (2) the promise must be sufficiently definite, vague assurances rarely support estoppel; (3) reliance must be reasonable, careless or unreasonable reliance is not protected; (4) damages must be substantial. Best practice: when relying on important promises before contract execution, document the promise in writing, document the reliance, and limit reliance investment until formal contract is in place. Related Terms Quantum Meruit · Consideration · Statute of Frauds · Material Adverse Change · Letter of Intent Promissory Note § A written instrument by which one party (the maker) unconditionally promises to pay a sum of money to another party at a specified time or on demand. Negotiable instruments under UCC Article 3. A promissory note is a written instrument by which one party (the "maker") unconditionally promises to pay a sum of money to another party (the "payee" or to the holder of the note) at a specified time or on demand. Promissory notes are negotiable instruments under UCC Article 3, codified in Texas at Tex. Bus. & Com. Code Chapter 3 . Authority Tex. Bus. & Com. Code Ch. 3 (negotiable instruments): § 3.103 (note definition); § 3.104 (negotiable instrument); § 3.108 (payable on demand or at definite time); § 3.302 (holder in due course); § 3.305 (defenses); §§ 3.601–3.605 (discharge). Required elements for negotiability (§ 3.104) (1) Unconditional promise to pay; (2) a fixed amount of money; (3) payable to bearer or to order; (4) payable on demand or at a definite time; (5) does not state any other undertaking by the maker except as authorized by Article 3 (e.g., promise to provide collateral, confession of judgment, waiver of laws benefiting the obligor). Holder in due course (§ 3.302) A holder who takes a negotiable instrument (1) for value; (2) in good faith; (3) without notice of overdue status, dishonor, or defense; takes free of most defenses available against the original payee. This doctrine is the principal commercial value of negotiability, a holder in due course can enforce the note even if the maker has defenses (failure of consideration, fraud in the inducement) against the original payee. Statute of frauds Loan agreements in excess of $50,000 are subject to Tex. Bus. & Com. Code § 26.02 , they must be in writing. Promissory notes evidencing such loans satisfy the requirement. Practical context Promissory notes are foundational to commercial lending and often paired with security agreements, guaranty agreements, and UCC-1 filings to create a complete secured-transaction structure. Note drafting involves precise specification of principal, interest rate, payment schedule, default, and acceleration terms. Defects affecting negotiability eliminate the holder-in-due-course protection and reduce the note to ordinary contract status. Companion article: Raising Capital in Texas Related Terms Guaranty Agreement · Security Interest · Statute of Frauds Proxy § The authority granted by a shareholder to another person (the proxy holder) to vote the shareholder's shares at a shareholder meeting. The term also refers to the document evidencing that authority. A proxy is the authority granted by a shareholder to another person (the proxy holder) to vote the shareholder's shares at a shareholder meeting. The term also refers to the document evidencing that authority. Authority Tex. Bus. Orgs. Code § 21.367 (voting in person or by proxy); § 21.368 (term of proxy); § 21.369 (revocability); § 21.370 (enforceability); § 21.371 (procedures in bylaws). Form and execution A proxy must be executed in writing or by an electronic transmission that satisfies § 6.252 . The proxy must identify the proxy holder and the shares to which the proxy applies. Term A proxy is valid for the length of time specified in the proxy. If no term is specified, the proxy is valid for 11 months from the date of execution. § 21.368 . Revocability A proxy is revocable by the shareholder unless the proxy is "coupled with an interest", for example, a proxy granted to a creditor secured by the shares, or a proxy granted to a buyer who has made partial payment. § 21.369 . Irrevocable proxies must clearly state their irrevocability and the interest supporting irrevocability. Enforceability against the corporation Under § 21.370 , the corporation may rely on a proxy that complies with the statute and is presented in accordance with the corporation's bylaws. Practical context Proxies are central to public-company voting because most shareholders do not attend meetings in person. In closely-held corporations, proxies are common in connection with planned absences (illness, travel) or with structured shareholder agreements granting voting authority to designated persons. Related Terms Voting · Shareholder · Annual Meeting · Special Meeting Q Qualified Small Business Stock (QSBS) § 2025 Stock that qualifies for the capital gains exclusion under Internal Revenue Code § 1202; substantially expanded by the One Big Beautiful Bill Act of 2025 to include tiered exclusions for shorter holding periods. Qualified Small Business Stock (QSBS) is stock that meets the requirements of Internal Revenue Code § 1202 , qualifying its holder for a capital gains exclusion at sale. To qualify, the stock must be (1) issued by a domestic C corporation, (2) issued to a non-corporate taxpayer, (3) acquired at original issuance directly from the corporation in exchange for money, property other than stock, or services, (4) issued by a corporation whose aggregate gross assets do not exceed the relevant threshold immediately before or after issuance, and (5) issued by a corporation that conducts a qualified trade or business under the active business requirement (at least 80% of assets used in a qualified trade, with specific service businesses excluded under § 1202(e)(3) ). Pre-OBBBA rules (stock issued through July 4, 2025) Under the rules in effect before the One Big Beautiful Bill Act, QSBS held for more than five years qualified for a 100% federal capital gains exclusion (for stock acquired after September 27, 2010). The per-issuer gain cap was the greater of $10 million or 10 times adjusted basis. The aggregate gross assets ceiling was $50 million immediately before or after issuance. Post-OBBBA rules (stock issued after July 4, 2025) The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, substantially expanded Section 1202 for QSBS issued after that date. The post-OBBBA regime introduced tiered exclusions (50% at 3 years, 75% at 4 years, 100% at 5+ years), raised the per-issuer gain cap from $10 million to $15 million (indexed for inflation from 2027), and raised the aggregate gross assets ceiling from $50 million to $75 million (also indexed). Pre-OBBBA QSBS continues to be governed by the original rules; the IRS does not allow stock to be "refreshed" into the new regime through restructuring. Authority Internal Revenue Code § 1202 ; Treasury Regulations under § 1202; Internal Revenue Code § 1045 (rollover provisions); One Big Beautiful Bill Act of 2025 (P.L. 119-21). Texas conformity Texas conforms to federal Section 1202 treatment because Texas does not impose a state income tax. The federal exclusion is therefore the effective exclusion for Texas-resident taxpayers, in contrast to non-conforming states (including California, Pennsylvania, New Jersey, Mississippi, and Alabama) where state income tax applies to QSBS gain regardless of the federal exclusion. Quantum Meruit § An equitable doctrine permitting recovery of the reasonable value of services rendered or benefits conferred, where there is no enforceable contract covering the services. Texas requires (1) valuable services or materials furnished, (2) for the person sought to be charged, (3) accepted by that person, (4) under circumstances reasonably notifying the recipient that the provider expected to be paid. Heldenfels Bros. v. City of Corpus Christi, 832 S.W.2d 39 (Tex. 1992), is the controlling case. Quantum meruit is an equitable doctrine permitting recovery of the reasonable value of services rendered or benefits conferred, where there is no enforceable contract covering the services. The doctrine prevents unjust enrichment by allowing service providers to recover even without formal contract. Texas applies a four-element framework articulated in Heldenfels Bros. v. City of Corpus Christi , 832 S.W.2d 39 (Tex. 1992). Authority Foundational Texas case: Heldenfels Bros., Inc. v. City of Corpus Christi , 832 S.W.2d 39 (Tex. 1992) (four-element quantum meruit framework). Earlier articulation: Vortt Exploration Co. v. Chevron U.S.A., Inc. , 787 S.W.2d 942 (Tex. 1990). Distinction from contract recovery: Truly v. Austin , 744 S.W.2d 934 (Tex. 1988) (quantum meruit unavailable where express contract covers same subject). Construction-industry application: Hill v. Shamoun & Norman, LLP , 544 S.W.3d 724 (Tex. 2018) (limitations on attorney quantum meruit). Statute of limitations: Tex. Civ. Prac. & Rem. Code § 16.051 (4 years for residual contract claims). The four-element framework Heldenfels Bros. v. City of Corpus Christi articulates the four elements: (1) valuable services or materials furnished ; (2) to the party sought to be charged ; (3) accepted by that party ; (4) under circumstances reasonably notifying the recipient that the provider expected to be paid . The fourth element is critical and often dispositive, services provided gratuitously, by family members, as a favor, or in volunteer contexts do not support quantum meruit because the "reasonable expectation of payment" element fails. The express contract bar Truly v. Austin , 744 S.W.2d 934 (Tex. 1988), established the principal limitation on quantum meruit: it is generally unavailable when an express contract covers the same subject matter. The rationale: quantum meruit is an equitable gap-filler; where the parties have agreed on terms, those terms govern. Application: a contractor who completes work under an express written contract cannot pursue quantum meruit if the work is covered by the contract, recovery must be under the contract terms. Quantum meruit may be pleaded as an alternative theory but cannot recover if the express contract applies and is enforceable. Common applications Recurring fact patterns in Texas commercial quantum meruit: (1) contractor work outside the contract scope , extra work performed on the same project beyond the contract specifications; (2) professional services , accountant, consultant, or advisor performs services with no formal engagement letter or where engagement is unclear; (3) real estate broker commissions , commission disputes where listing agreement is contested; (4) partnership dissolution , partner who provided services without express compensation arrangement; (5) landlord improvements , tenant performs improvements not covered by lease; (6) aborted transactions , deal fails before close, but party performed substantial work in reliance. Damages, reasonable value Quantum meruit recovery is the reasonable value of services rendered or benefits conferred, not the contract price (which doesn't exist) and not the gain to the recipient (which is unjust enrichment, a related but distinct doctrine). Reasonable value is typically established through (1) market rates for similar services; (2) the provider's customary rates; (3) industry standards; (4) expert testimony on commercially reasonable charges. The recipient's actual gain is relevant but not dispositive, quantum meruit recovers fair compensation for the work, not the windfall to the recipient. Distinction from unjust enrichment Quantum meruit and unjust enrichment are closely related equitable doctrines but distinct: (1) quantum meruit , focuses on services rendered; recovery is the reasonable value of those services; (2) unjust enrichment , focuses on benefit retained by the defendant; recovery is the value of the benefit conferred. Both prevent unjust enrichment in the broad sense but with different framing. Texas courts treat them as separate causes of action with overlapping elements; sophisticated pleadings include both as alternatives. Distinction from promissory estoppel Quantum meruit and promissory estoppel address different fact patterns: (1) quantum meruit , based on services rendered or benefits conferred; no promise required; (2) promissory estoppel , based on a promise that was relied upon; no actual services to recipient required. A construction subcontractor who builds out a project before the prime contractor signs the subcontract has both: services rendered (quantum meruit) and reliance on the prime contractor's promises (promissory estoppel). See Promissory Estoppel . Statute of limitations Quantum meruit claims are typically subject to the 4-year residual statute of limitations under § 16.051, running from the date the cause of action accrued. Accrual generally occurs when (1) services were rendered and (2) the defendant refused payment or otherwise made clear that compensation would not be forthcoming. Where services are continuing, the limitations period may run from the last services rendered. Practical context For Texas commercial service providers, quantum meruit is the principal recovery theory when formal contract is unavailable. Best practice: (1) document the work performed contemporaneously with detailed records; (2) document the recipient's awareness of and acceptance of the work; (3) document any communications suggesting payment expectation; (4) plead quantum meruit alternatively to breach of contract; (5) prepare reasonable-value evidence (market rates, customary charges, expert testimony). Common defenses: (1) express contract covers the subject matter (the principal bar); (2) services were gratuitous or volunteered; (3) recipient did not accept the services; (4) limitations expired; (5) the value claimed is excessive. Provider best practice for prevention: get engagement letters and scope-of-work documents in writing before substantial work begins, quantum meruit is a backup, not a strategy. Related Terms Promissory Estoppel · Consideration · Statute of Frauds · Statute of Limitations · Construction Contract Quorum § The minimum number of shares entitled to vote that must be represented at a shareholder meeting for the meeting to validly transact business. Default: a majority of shares entitled to vote. A quorum is the minimum number of shares entitled to vote that must be represented (in person, by remote communication, or by proxy) at a shareholder meeting for the meeting to validly transact business. The default quorum is a majority of shares entitled to vote. Authority Tex. Bus. Orgs. Code § 21.358 (shareholder quorum); § 6.151 (general quorum rule for governing bodies); § 21.408 (director quorum and acts). Default rule Under § 21.358(a) , unless the certificate of formation provides otherwise, the holders of a majority of the shares entitled to vote, represented in person or by proxy, constitute a quorum at a meeting of shareholders. Modification limits The certificate of formation may set the quorum requirement at greater or less than a majority, but not less than one-third. § 21.358(b) . The certificate or bylaws may also provide that the withdrawal of shareholders from a meeting may negate the presence of a quorum ( § 21.358(c) ) and may restrict the ability of remaining shareholders to adjourn and reschedule when no quorum is present ( § 21.358(d) ). Director quorum The default quorum for a board meeting is a majority of the number of directors fixed by the certificate or bylaws. § 21.416 . The act of a majority of directors present at a meeting at which a quorum is present is the act of the board, unless the certificate or bylaws require a higher vote. Practical context Quorum manipulation, withdrawing to break quorum, calling meetings without proper notice, or shifting the quorum threshold by amendment, is a recurring source of closely-held-corporation governance disputes. Related Terms Annual Meeting · Special Meeting · Voting · Shareholder · Director R Ratification § The act by which a corporation, through its board of directors, shareholders, or both, retroactively approves a defective or unauthorized corporate act, curing the defect and giving the act binding effect. Texas codified a comprehensive ratification regime in 2014. Ratification is the act by which a corporation, through its board of directors, shareholders, or both, retroactively approves a defective or unauthorized corporate act, curing the defect and giving the act binding effect. Texas codified a comprehensive ratification regime in 2014, modeled on Delaware's similar provisions. Authority Tex. Bus. Orgs. Code Subchapter L-1 of Chapter 21: §§ 21.901–21.913 (ratification of defective corporate acts). What may be ratified Under § 21.901 , a "defective corporate act" includes any act that would have been within the power of the corporation but was, at the time, void or voidable due to a failure of authorization. Examples: shares issued without sufficient authorized capital, board action without quorum, shareholder votes without proper notice. Procedure (§§ 21.904–21.907) The board of directors must adopt resolutions stating the defective act, the date of the act, the nature of the defect, and the proposed ratification. If shareholder approval would have been required for the original act, shareholder approval is also required for the ratification. Notice must be given to all shareholders. Effect of ratification (§ 21.910) The defective act, as ratified, is treated as having been authorized as of the date of the original act, retroactively to the date of the act. The ratification cures the defect for all purposes, including litigation and contract enforcement. Court action (§ 21.912) Where ratification under the statute is impractical or contested, the corporation, a director, an officer, or a shareholder may petition the district court for an order validating the defective corporate act. The court has broad discretion to fashion appropriate relief. Practical context The ratification statute is a critical due-diligence tool. M&A transactions, financing rounds, and IPOs frequently uncover defective historic corporate acts (improper share issuances, missed shareholder votes, undocumented board actions) that must be cleaned up before closing. The ratification statute provides a clear procedure that pre-2014 Texas law did not. Related Terms Director · Shareholder · Corporation · Action by Written Consent · Voting · Due Diligence Reasonable Compensation Doctrine § The IRS doctrine requiring S-corporation shareholder-employees to receive reasonable wages for services performed before taking distributions. Designed to prevent S-corp owners from avoiding employment taxes by characterizing compensation as distributions. Underpayment exposes the corporation and shareholder to reclassification, back payroll taxes, penalties, and interest. The reasonable compensation doctrine requires S-corporation shareholder-employees to receive reasonable wages for services rendered to the corporation before taking distributions of corporate earnings. The doctrine is the IRS's principal enforcement mechanism against S-corp owners who attempt to avoid Social Security and Medicare taxes (FICA) by characterizing what should be wages as tax-favored distributions instead. The IRS has identified S-corp reasonable compensation as an ongoing audit priority. Authority Statutory framework: 26 U.S.C. § 1361 et seq. (Subchapter S); § 3121 (FICA wages defined); § 3306 (FUTA wages). Reasonable compensation principles: 26 U.S.C. § 162(a)(1) (deductibility of reasonable compensation). Reclassification authority: 26 C.F.R. § 31.3121(d)-1 . Foundational case law: Watson, P.C. v. United States , 668 F.3d 1008 (8th Cir. 2012) (IRS reclassification of distributions as wages affirmed); David E. Watson, P.C. v. United States , 757 F. Supp. 2d 877 (S.D. Iowa 2010). IRS Fact Sheet 2008-25 on reasonable compensation factors. Why the doctrine exists S-corporation income passes through to shareholders without being subject to self-employment tax (unlike partnership distributions, which are generally subject to SE tax for general partners). Wages paid by an S-corp to a shareholder-employee are subject to FICA (15.3% combined employer/employee, with the Medicare portion uncapped). This creates a tax-arbitrage incentive for S-corp owners: minimize wages, maximize distributions. The reasonable compensation doctrine, combined with potential IRS reclassification authority, prevents the abuse. Reasonable compensation factors The IRS and courts apply a multi-factor test to determine reasonableness, including: (1) training and experience of the shareholder; (2) duties and responsibilities; (3) time and effort devoted to the business; (4) dividend history; (5) payments to non-shareholder employees in similar roles; (6) timing and manner of paying bonuses to key personnel; (7) what comparable businesses pay for similar services; (8) compensation agreements; (9) the use of a formula to determine compensation. Comparative data, published industry surveys, reasonable-compensation studies (RCReports, Salary.com), provides defensible support. IRS reclassification consequences If the IRS determines that distributions paid in lieu of wages were unreasonable, it may reclassify those distributions as wages. The corporation owes back FICA (employer 7.65% plus shareholder 7.65%) plus FUTA, plus penalties (typically 10%-25% of underpayment) and interest. For multi-year audit periods, the cumulative exposure can dwarf any tax savings achieved by under-paying wages. Statute of limitations is generally three years, but extends to six years for substantial omissions. Practical compensation analysis Defensible reasonable-compensation determinations include: (1) external market data for the role and industry; (2) the shareholder-employee's specific duties documented in writing; (3) a formula or methodology applied consistently across years; (4) consideration of dividend history and corporation profitability; (5) board or written-consent documentation of the compensation decision. The compensation decision should be made and documented annually, not improvised at year-end. Practical context For Texas S-corp owners, the reasonable compensation question becomes pointed at three moments: (1) at S-corp election, establishing initial wage levels; (2) during a profitable year when distributions are large relative to wages; (3) under IRS examination. Best-practice posture is annual documented compensation analysis (typically 30-60 minutes of work using comparable-compensation tools) with the analysis retained in the corporate records. The cost of analysis is small compared to a multi-year reclassification audit. Companion article: Before You Fire That Employee, Texas Pre-Termination Checklist Related Terms S-Corporation Election · Pass-Through Entity · Distribution · Tax Distribution Provision · Fair Labor Standards Act Registered Agent § The person or organization designated by a Texas filing entity to receive service of process and other official communications on the entity's behalf. Every Texas filing entity must designate and continuously maintain a registered agent and registered office. A registered agent is the person or organization designated by a Texas filing entity to receive service of process and other official communications on the entity's behalf. Every Texas corporation, LLC, and other filing entity must designate and continuously maintain a registered agent and a registered office in Texas. Authority Tex. Bus. Orgs. Code § 5.201 (registered agent and office); § 5.2011 (consent requirement); §§ 5.251–5.255 (substitute service); § 9.001(a) (foreign-entity application); § 5.252 (Secretary of State as substitute agent). Requirements Under § 5.201 , every domestic and foreign filing entity must designate and continuously maintain (1) a registered agent, either an individual Texas resident or an organization authorized to transact business in Texas, and (2) a registered office at a Texas street address where service of process may be personally served during normal business hours. The registered office may not be solely a mailbox service or telephone answering service. Consent requirement Effective January 1, 2010, § 5.2011 requires that the registered agent must have consented in writing or by electronic record to serve in that capacity. The consent need not be filed but must be retained by the entity. Substitute service When a registered agent or office cannot be found through reasonable diligence, § 5.251 authorizes service of process on the Texas Secretary of State as substitute agent. The Secretary forwards process to the entity by certified mail under § 5.253 . Practical context Many Texas entities use commercial registered-agent services (CT Corporation, Cogency Global, Northwest Registered Agent) rather than designating an officer or attorney. Failure to maintain a registered agent does not affect the validity of the entity's acts but exposes the entity to substitute service through the Secretary of State and to forfeiture for failure to maintain a registered agent under TBOC § 11.251(a)(3) . Companion article: Starting a Business in Texas Related Terms Certificate of Formation · Foreign Entity · Corporation · Limited Liability Company Regulation A+ § SEC rules under Title IV of the JOBS Act creating two tiers of "mini-IPO" offerings. Tier 1: up to $20 million annually with state-level registration. Tier 2: up to $75 million annually with SEC qualification, audited financial statements, ongoing reporting, and state-law preemption. Securities are freely tradable post-offering (subject to investor type limits in Tier 2). Form 1-A offering circular required. Useful intermediate path between Reg D private placements and full Form S-1 IPO. Regulation A+ (also called Reg A) is an SEC framework under Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012 creating "mini-IPO" offerings for non-accredited investors. The framework provides two tiers: Tier 1 (up to $20 million) requires state-level registration; Tier 2 (up to $75 million) requires SEC qualification with state-law preemption. Reg A+ is an intermediate path between Reg D private placements (limited to specific investor types) and full Form S-1 IPO (substantial cost and ongoing reporting). Securities issued under Reg A+ are freely tradable, supporting secondary liquidity. Authority SEC regulations: 17 C.F.R. § 230.251 et seq. (Regulation A). Statutory basis: 15 U.S.C. § 77c(b)(2) (Securities Act § 3(b)(2)). 2015 implementation: SEC Release No. 33-9741. 2021 expansion: SEC Release No. 33-10884 (Tier 2 limit raised from $50M to $75M). Form 1-A: 17 C.F.R. § 239.90 . Ongoing reporting: 17 C.F.R. § 230.257 . Tier 1 vs. Tier 2, key differences The two Reg A+ tiers: (1) Tier 1 : up to $20 million annually; state-level registration required (substantial multi-state burden); no ongoing SEC reporting; no audited financial statement requirement; (2) Tier 2 : up to $75 million annually; SEC-only qualification (state-law preemption); ongoing semiannual and annual SEC reporting; audited financial statement requirement; per-investor investment limits for non-accredited (10% of greater of annual income or net worth). Most issuers use Tier 2 because the state-law preemption avoids the multi-state registration burden, typically more cost-efficient than Tier 1's state-by-state approach. Form 1-A offering circular Reg A+ offerings require Form 1-A offering circular qualified by the SEC. Form 1-A is a comprehensive disclosure document parallel to Form S-1 but with reduced requirements: (1) business description ; (2) risk factors ; (3) management discussion and analysis ; (4) directors, officers, and significant employees ; (5) compensation of directors and executive officers ; (6) security ownership ; (7) related-party transactions ; (8) financial statements , Tier 2 requires audited; (9) use of proceeds ; (10) plan of distribution . The SEC qualification process typically takes 3-6 months including comment-and-response cycles. Per-investor limits (Tier 2) Tier 2 imposes per-investor investment limits for non-accredited investors: 10% of the greater of annual income or net worth (per offering). Accredited investors face no per-investor limits. The limit applies on per-offering basis, not aggregate across all offerings. The per-investor limits are intended to protect retail investors from concentration risk while still permitting meaningful retail participation. Issuers must obtain investor representations regarding the limits. Testing the waters Reg A+ permits "testing the waters", issuers can solicit investor interest before filing Form 1-A: (1) before filing , solicitation permitted with required legends; (2) after filing but before qualification , solicitation permitted with offering circular delivery requirement. Testing the waters allows: (a) gauging investor interest before incurring offering costs; (b) building investor list; (c) refining offering terms based on feedback. Subject to anti-fraud rules, false or misleading communications create exposure regardless of formal status. Ongoing reporting (Tier 2) Tier 2 issuers face ongoing SEC reporting: (1) Form 1-K (annual report), comprehensive annual disclosure with audited financial statements; (2) Form 1-SA (semiannual report), interim financial statements and updated information; (3) Form 1-U (current report), for material events; (4) Form 1-Z (suspension/termination of reporting). The reporting burden is substantial, comparable to but somewhat lighter than full Exchange Act reporting. Issuers should evaluate reporting cost as part of Reg A+ economics. Securities tradability Reg A+ securities are freely tradable after qualification (no Rule 144-style holding period for non-affiliates), supporting secondary liquidity. This distinguishes Reg A+ from Reg D (where Rule 144 typically requires 6-month or 1-year holding). Some Reg A+ issuers list securities on OTC markets or specialized platforms for secondary trading. The free tradability supports retail investor participation but creates ongoing market dynamics for issuer. Comparison to alternatives Reg A+ comparison: (1) vs. Reg D , Reg D limits to specific investor types but no offering size limit; Reg A+ permits non-accredited but caps offering size; (2) vs. Reg CF , Reg CF caps at $5M; Reg A+ Tier 2 caps at $75M; (3) vs. Form S-1 IPO , Form S-1 has no offering limit but substantially higher cost ($2-5M+ typical); Reg A+ has lower cost ($300K-$1M typical); (4) vs. Reverse Merger , different mechanism for going public; Reg A+ is direct primary offering. Reg A+ fills the gap between Reg CF and full IPO for offerings $5M-$75M targeting retail investors. Practical context For Texas issuers considering Reg A+, the framework supports specific use cases: (1) consumer-facing brands with retail investor base; (2) pre-IPO companies wanting public-style distribution before full S-1; (3) companies needing $5M-$75M without limiting to accredited investors; (4) issuers wanting tradable securities post-offering. Best practice: (1) evaluate Tier 1 vs. Tier 2, most use Tier 2 for state preemption; (2) prepare for substantial offering costs ($300K-$1M typical) including SEC counsel, audit, marketing; (3) plan for 6-12 month timeline from initial preparation to qualification; (4) coordinate with funding portal or broker-dealer for offering execution; (5) evaluate ongoing reporting burden as part of total cost; (6) consider OTC listing for secondary trading. For investors: (1) understand per-investor limits (10% threshold for non-accredited); (2) recognize free tradability post-offering; (3) review Form 1-A offering circular thoroughly. Common pitfall: issuers underestimating SEC qualification timeline (typically 3-6 months including SEC comments) and total offering cost, Reg A+ is substantially more expensive and slower than Reg D. Related Terms Regulation D · Regulation CF · Accredited Investor · Reverse Merger · Texas Securities Act Regulation Crowdfunding (Reg CF) § SEC rules under Title III of the JOBS Act of 2012 permitting crowdfunding offerings to non-accredited investors through registered funding portals or broker-dealers. Annual offering limit $5 million (raised from $1.07M in 2021). Per-investor limits based on income/net worth. Requires Form C disclosure, financial statements, and ongoing reporting. Most-used framework for online retail-investor capital raising. Codified at 17 C.F.R. § 227.100 et seq. Regulation Crowdfunding (Reg CF) is the SEC framework permitting crowdfunding offerings to non-accredited investors through registered funding portals or broker-dealers. Authorized by Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 and effective in 2016, Reg CF was significantly expanded in 2021 with the offering limit raised from $1.07 million to $5 million annually. Reg CF is the most-used framework for online retail-investor capital raising in the U.S., supporting platforms like Republic, StartEngine, Wefunder, and others. Authority SEC regulations: 17 C.F.R. § 227.100 et seq. (Regulation Crowdfunding). Statutory basis: Title III of JOBS Act 2012; 15 U.S.C. § 77d(a)(6) (Securities Act § 4(a)(6), crowdfunding exemption). 2021 expansion: SEC Release No. 33-10844 (raising offering limit to $5M, expanding investor limits, permitting "testing the waters"). Funding portal regulation: 17 C.F.R. § 227.300-227.404 (Title II of Regulation Crowdfunding). Annual offering limit, $5 million The Reg CF annual offering limit is $5 million in any 12-month period (raised from $1.07 million in March 2021). The increase substantially expanded Reg CF's utility for growing companies, pre-2021, Reg CF was practical only for very early-stage offerings; post-2021 expansion, Reg CF supports more substantial Series A-equivalent offerings. Per-investor limits Reg CF imposes per-investor limits based on income/net worth: (1) both income and net worth less than $124,000 , the greater of $2,500 or 5% of the lesser of annual income or net worth; (2) either income or net worth ≥$124,000 , 10% of the lesser of annual income or net worth, up to $124,000 maximum; (3) accredited investors , no per-investor limit (post-2021 expansion). The thresholds are adjusted periodically for inflation. Per-investor limits are aggregated across all Reg CF offerings in 12-month period. Funding portal requirement Reg CF offerings must be conducted through SEC-registered funding portals or broker-dealers. Major U.S. platforms: (1) Wefunder ; (2) StartEngine ; (3) Republic ; (4) Honeycomb Credit ; (5) Mainvest ; and others. Funding portals are subject to SEC and FINRA regulation including: registration, AML, customer protection, communications restrictions, due diligence requirements. Issuers contract with platforms for offering execution; platforms charge fees (typically 5-10% of capital raised) plus equity in some cases. Form C disclosure Reg CF issuers must file Form C with the SEC and provide it to investors via the funding portal. Form C disclosures include: (1) company description , business, products, market; (2) management , directors, officers, 20%+ owners; (3) financial information , based on offering size: (a) up to $124K, internal financial statements; (b) $124K-$1.235M, independently reviewed financial statements; (c) $1.235M-$5M, independently audited financial statements; (4) use of proceeds ; (5) offering terms , security type, pricing, investor rights; (6) risk factors ; (7) related-party transactions ; (8) indebtedness . The financial statement requirements escalate with offering size, audited statements above $1.235M is significant compliance burden. Ongoing reporting Reg CF issuers must file ongoing reports with the SEC: (1) Form C-AR (annual report), filed annually until first of: (a) issuer becomes Exchange Act reporting company; (b) issuer has $10M+ assets and 300+ holders for two consecutive years; (c) issuer or third party purchases all Reg CF securities; (d) liquidation. Annual reporting includes audited financial statements (for offerings $1.235M+) and updated business information. Ongoing reporting burden is substantial for small companies. Resale restrictions Reg CF securities are subject to one-year resale restriction. After 12 months, securities can be resold subject to: (1) Rule 144 requirements for sales to public; (2) private resales to accredited investors. Many funding portals offer secondary trading platforms supporting Reg CF securities; secondary liquidity is improving but remains limited compared to public-market alternatives. Testing the waters (2021 expansion) The 2021 expansion permits "testing the waters" before formal Reg CF offering, issuers can solicit investor interest without committing to specific offering terms. This allows: (1) gauging investor interest before incurring offering costs; (2) building investor list; (3) refining offering terms based on feedback. Communications must include specific disclosures and cannot solicit money before formal offering launch. Testing the waters provisions parallel Rule 506(c) and Reg A+ analogous provisions. Bad actor disqualification Reg CF includes Rule 503 bad actor disqualification parallel to Rule 506(d): covered persons (issuer, directors, officers, 20%+ owners, certain promoters) cannot have specified disqualifying events. Disqualification voids ability to use Reg CF, comprehensive bad actor checks are required before Reg CF offering. Funding portals typically conduct bad actor verification as part of issuer onboarding. Practical context For Texas issuers considering Reg CF, the framework is best suited for consumer-facing brands with passionate retail investor bases. Best practice: (1) evaluate Reg CF vs. Reg D, Reg CF works for retail investor base; Reg D for institutional/accredited; (2) for offerings above $1.235M, prepare for audited financial statements requirement, substantial cost; (3) coordinate with funding portal, fees, equity, ongoing relationship; (4) consider ongoing reporting burden, annual financials and disclosures; (5) coordinate Reg CF with anticipated subsequent rounds, Reg CF investors create cap table complexity for future Reg D rounds; (6) leverage marketing and community-building benefits of Reg CF (transparency, community engagement). For investors: (1) understand per-investor limits; (2) conduct independent due diligence, funding portals do limited verification; (3) recognize illiquidity (12-month minimum hold); (4) coordinate Reg CF investments across multiple offerings to manage limits. Common pitfall: issuers underestimating ongoing reporting burden, annual audited financial statements are expensive and burdensome for small companies. Related Terms Regulation D · Regulation A+ · Accredited Investor · Texas Securities Act · Form D Regulation D § SEC rules (17 C.F.R. §§ 230.500-230.508) providing safe-harbor exemptions from securities registration for private offerings. Three principal exemptions: Rule 504 (limited offerings up to $10M), Rule 506(b) (unlimited amount; up to 35 non-accredited investors plus unlimited accredited; no general solicitation), Rule 506(c) (unlimited amount; accredited investors only with verification; general solicitation permitted). Most U.S. private capital raising relies on Rule 506. Regulation D is the SEC's principal safe-harbor framework for private securities offerings, exempting qualifying transactions from the registration requirements of the Securities Act of 1933. Most U.S. private capital raising relies on Regulation D; the rules establish predictable parameters for issuers to raise capital from investors without the cost and disclosure burdens of registered public offerings. Three principal exemptions: Rule 504 (limited offerings), Rule 506(b) (unlimited amount, no general solicitation), Rule 506(c) (unlimited amount, general solicitation permitted with accredited-only investors). Authority SEC regulations: 17 C.F.R. §§ 230.500-230.508 . Rule 504: § 230.504 . Rule 506(b): § 230.506(b) . Rule 506(c): § 230.506(c) . Form D filing: § 230.503 . State-law preemption: 15 U.S.C. § 77r(b)(4) (NSMIA, National Securities Markets Improvement Act of 1996; "covered securities" preempt state registration but not anti-fraud or notice/fee requirements). Statutory basis: Securities Act of 1933 § 4(a)(2) . Rule 504, limited offerings Rule 504 permits offerings up to $10 million in any 12-month period with significant flexibility: no investor sophistication requirements; no specific federal disclosure requirements; general solicitation permitted in some circumstances (with state-law restrictions). The trade-off: state-law registration requirements remain, Rule 504 securities are NOT "covered securities" preempting state registration. Rule 504 is most useful for small offerings in single state or limited number of states. Rule 506(b), the workhorse Rule 506(b) is the most commonly used Reg D exemption: (1) no general solicitation ; (2) up to 35 non-accredited investors plus unlimited accredited; (3) sophistication requirement for non-accredited, issuer must reasonably believe each non-accredited investor has knowledge and experience to evaluate the investment; (4) disclosure requirements , if any non-accredited investors, specific disclosure required (typically PPM); (5) Form D filing within 15 days of first sale; (6) covered securities , preempts state registration. Most issuers limit to accredited-only to avoid the non-accredited disclosure requirements. Rule 506(c), general solicitation permitted Rule 506(c), added by the JOBS Act in 2013, permits general solicitation but with stricter investor requirements: (1) all purchasers must be accredited investors ; (2) issuer must take reasonable steps to verify accredited status , self-certification is insufficient; (3) unlimited offering amount ; (4) covered securities ; (5) Form D filing required. Verification methods: tax returns, financial statements, third-party confirmation from broker-dealer/RIA/attorney/CPA, or third-party verification services. The general solicitation flexibility is valuable for online offerings, demo days, and broad marketing, but the verification burden is meaningful. Form D filing Issuers using Reg D must file Form D with the SEC within 15 days of the first sale of securities. Form D includes issuer information, offering details (rule used, amount, types of investors), related persons, and certification. Form D is filed electronically through EDGAR. Failure to file timely does not by itself void the exemption but signals non-compliance. Most states require parallel notice filings within similar timeframes. Bad Actor disqualification Rule 506(d) "bad actor" disqualification prevents reliance on Rule 506 by issuers where covered persons (issuer, directors, officers, 20%+ beneficial owners, GPs of pooled investment funds, certain promoters and compensated solicitors) have specified disqualifying events: criminal convictions related to securities; court injunctions; SEC disciplinary orders; suspensions/expulsions from SROs. Disqualification is forward-looking only, does not apply to pre-Sept. 23, 2013 events but requires written disclosure. Bad actor checks are critical compliance step before Reg D offerings. Rule 506(b) vs. 506(c) trade-off The choice: (1) 506(b) , no general solicitation but self-certification of accredited status acceptable; up to 35 non-accredited; works well for relationship-driven offerings to known investors; (2) 506(c) , general solicitation permitted (online marketing, demo days, public communications) but accredited-only with verification burden; works well for broader marketing and online offerings. Practical context For Texas issuers raising private capital, Reg D is foundational. Best practice: (1) determine which Reg D rule fits, most use 506(b); 506(c) for broader marketing; 504 for small offerings; (2) for 506(b), prepare PPM if any non-accredited investors will be included, typically simpler to limit to accredited only; (3) for 506(c), implement verification process; (4) conduct bad actor checks on all covered persons before offering; (5) file Form D within 15 days of first sale; (6) coordinate state notice filings; (7) maintain documentation of investor qualification. Common pitfall: issuers conducting general solicitation in 506(b) offerings without recognizing the risk, investors learn about the offering through public channels, voiding the 506(b) exemption. Related Terms Accredited Investor · Form D · Private Placement Memorandum · Texas Securities Act · Regulation CF Release § A contractual or unilateral relinquishment of a known claim against another party. Releases bar future claims within their scope; the scope is determined by the release language. Texas applies general contract-interpretation principles, with sophisticated parties presumed to understand release terms. Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997), addresses the validity of releases despite mistake and fraud allegations. Releases of unknown claims must be expressly stated. A release is a contractual or unilateral relinquishment of a known claim against another party. Releases are foundational to settlement practice, most settlements include a release of the underlying claims, often coupled with mutual releases of all claims between the parties. The scope of a release is determined by its language; sophisticated commercial parties are generally bound to the terms they sign, even if the release covers more than was specifically negotiated. Authority Foundational Texas case on release validity: Schlumberger Technology Corp. v. Swanson , 959 S.W.2d 171 (Tex. 1997) (release with disclaimer of reliance enforceable despite fraud allegations); Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of America , 341 S.W.3d 323 (Tex. 2011) (refining Schlumberger). Release of unknown claims: Memorial Med. Ctr. of E. Texas v. Keszler , 943 S.W.2d 433 (Tex. 1997). General contract interpretation rules apply: Coker v. Coker , 650 S.W.2d 391 (Tex. 1983). Statutory restrictions: Tex. Bus. & Com. Code § 17.42 (DTPA waiver bar, limits releases of consumer DTPA claims). Types of releases Common release structures: (1) specific release , releases identified claims (e.g., "all claims arising out of the lease dated [date]"); narrowest in scope; (2) broad release , releases all claims, known and unknown, between the parties as of the release date; (3) mutual release , both parties release each other; standard in commercial settlements; (4) unilateral release , only one party releases; common where consideration runs one way (employee severance, loan workout); (5) general release , all claims of every kind, often with broad "including but not limited to" language. The scope of release language is heavily negotiated and often decisive in subsequent disputes. The Schlumberger framework, disclaimer of reliance Schlumberger Technology Corp. v. Swanson , 959 S.W.2d 171 (Tex. 1997), addressed the enforceability of releases against fraud and mutual-mistake claims. The Texas Supreme Court held that a release with a disclaimer of reliance, language stating that the releasing party did not rely on representations of the other side, can defeat fraudulent-inducement claims. Italian Cowboy Partners (Tex. 2011) refined the framework: the disclaimer must be (1) clear and unambiguous; (2) freely negotiated by sophisticated parties; (3) not against public policy. Sophisticated commercial releases routinely include disclaimer-of-reliance language to defeat post-release fraud claims. Release of unknown claims Standard release language often refers to "claims known and unknown", but Texas courts apply heightened scrutiny to releases of truly unknown claims. Memorial Med. Ctr. of E. Texas v. Keszler (Tex. 1997) requires that releases of unknown claims be expressly stated. Boilerplate "all claims" language may not cover claims that were unknown at release execution if the language is ambiguous. Best practice: specifically reference unknown claims with words like "whether known or unknown, foreseen or unforeseen, suspected or unsuspected", this language has been held effective. Statutory limits, DTPA waiver bar Section 17.42 of the Business and Commerce Code makes consumer waivers of DTPA rights "contrary to public policy and unenforceable" except in narrow circumstances. The DTPA waiver bar significantly limits the use of releases in consumer transactions. Three exceptions in § 17.42: (1) consumer not in disparate bargaining position; (2) advised by counsel; (3) knowing waiver in writing. The exceptions are narrow; consumer releases of DTPA claims should be drafted carefully with the § 17.42 exceptions in mind. Other public policy limits Texas courts decline to enforce releases of: (1) future intentional torts , generally void as against public policy; (2) statutory rights with anti-waiver provisions , DTPA, certain employment statutes, securities laws; (3) fraud in the execution of the release itself, the release was procured by fraud about its content; (4) release procured by duress . Most other releases are enforceable per their terms among sophisticated parties. Common drafting pitfalls Frequent release-drafting failures: (1) scope ambiguity , unclear what claims are covered, leading to litigation over scope; (2) missing affiliated parties , release covers only signatory but not affiliates, parent, subsidiaries, employees; (3) missing future claims , release covers existing claims but not claims arising from same circumstances; (4) missing third parties , release covers parties but not third parties who may sue (employees, customers); (5) no disclaimer of reliance , exposing release to fraud-claim attack; (6) missing severability , entire release void if one provision is unenforceable. Enforcement and challenges Common challenges to releases: (1) fraud in inducement , release procured through misrepresentation (defeated by Schlumberger disclaimer when properly drafted); (2) mutual mistake , both parties operated under the same factual misunderstanding; (3) unconscionability , release terms or process so unfair as to be void; (4) scope challenge , claim falls outside the release language; (5) capacity , releasor lacked authority or capacity; (6) consideration , release given without consideration. Most challenges fail when the release was negotiated by sophisticated parties with counsel. Practical context For Texas commercial parties, release drafting is among the highest-leverage moments in settlement practice. Best practice: (1) draft scope precisely, reference specific claims, specific parties, specific timeframes; (2) include affiliated parties (parent, subsidiaries, employees, agents, attorneys); (3) cover both known and unknown claims with express language; (4) include disclaimer of reliance for sophisticated-party releases; (5) include mutual release where consideration flows both directions; (6) coordinate with confidentiality, non-disparagement, and other settlement provisions; (7) for consumer-facing releases, ensure DTPA § 17.42 compliance. The single most common failure: under-specifying scope, leaving room for the released party to assert claims that were technically not within the release language. Related Terms Settlement Agreement · Rule 11 Agreement · Severance Agreement · Deceptive Trade Practices Act · Mediation Removal § The procedural mechanism by which a defendant moves a case from state court to federal court. Available only for cases that originally could have been filed in federal court. Texas Business Court removal is governed by Tex. Gov't Code § 25A.006. Removal is the procedural mechanism by which a defendant moves a case from state court to federal court. Removal is available only for cases that originally could have been filed in federal court. The defendant must file a notice of removal in the federal district court for the district where the state court action is pending. Authority 28 U.S.C. § 1441 (general removal); § 1442 (federal officers); § 1443 (civil rights cases); § 1446 (procedure for removal); § 1447 (procedure after removal); § 1452 (removal of bankruptcy-related claims). Texas Business Court removal: Tex. Gov't Code § 25A.006 . Removal grounds A case may be removed if (1) the federal court would have had original jurisdiction over the case (federal question or diversity); (2) all defendants consent to removal (with limited exceptions); and (3) for diversity cases, no defendant is a citizen of the state where the action was filed (the "home-state defendant" rule). Timing Notice of removal must be filed within 30 days after service of the initial pleading. § 1446(b) . For cases that become removable later (e.g., after dismissal of a non-diverse defendant), the 30-day period runs from the date the case becomes removable. Remand A plaintiff who believes removal was improper may move for remand. § 1447(c) . Procedural defects (untimeliness, failure to obtain consent) must be raised within 30 days of removal; subject-matter-jurisdiction objections may be raised at any time. Texas Business Court removal Under Tex. Gov't Code § 25A.006 , qualifying cases filed in Texas district court may be removed to the Texas Business Court by agreement of all parties or, in some circumstances, on motion of one party. Practical context Removal is the principal forum-selection lever for defendants in cross-jurisdictional commercial disputes. Federal court generally favors defendants in many commercial contexts (procedure, judicial quality, summary judgment standards). Sophisticated defendants evaluate removal immediately on receipt of state-court process. Related Terms Subject Matter Jurisdiction · Personal Jurisdiction · Texas Business Court · Venue Representations and Warranties § Statements of fact made by one party (typically the seller) to another (typically the buyer) in a transaction agreement, covering the condition of the target business. The central risk-allocation mechanism in any M&A transaction. Representations and warranties are statements of fact made by one party (typically the seller) to another (typically the buyer) in a transaction agreement, covering the condition of the target business, its corporate organization, ownership of assets, financial statements, contracts, intellectual property, compliance with laws, litigation, employment, tax, and other material matters. A "representation" is technically a statement of present or past fact; a "warranty" is a promise that the fact is true. In Texas M&A practice the terms are used interchangeably. Authority Reps and warranties are creatures of contract, no central TBOC provision. Texas law on enforceability and the elements of breach follow general contract principles. Structure: general vs. fundamental Most M&A agreements distinguish between general reps (financial statements, contracts, IP, compliance, litigation) and fundamental reps (organization, capitalization, authority, ownership of equity, no broker fees). Fundamental reps typically have longer survival periods (often through the statute of limitations or perpetually) and higher (or no) indemnification caps; general reps typically survive 12–24 months and are subject to standard indemnification caps. Survival and limitation of liability Most agreements expressly provide that reps and warranties survive closing for a specified period, typically 12 to 24 months for general reps, longer or perpetual for fundamental reps and specific tax reps. The survival period operates as a contractual statute of limitations: claims must be brought within the survival period or are barred. Post-2020 RWI practice has lengthened typical RWI policy periods to three years for general reps, often longer than the seller's contractual liability period. Reliance and sandbagging Whether a buyer must demonstrate reliance on a rep to recover for breach is contested under Texas law. See Sandbagging . Pro-sandbagging clauses (buyer-favorable) and anti-sandbagging clauses (seller-favorable) are increasingly common to remove the question from the default rule. RWI market context As of 2025, RWI is used in approximately 75% of private-equity transactions and 60%+ of larger strategic acquisitions. Premium rates are historically low (2.5%–3% of policy limit), with retentions as low as 0.5% of enterprise value. Increased competition has produced buyer-favorable terms, though tariff uncertainty and slow 2025 deal volume have produced mixed market conditions. Practical context Reps and warranties are the central risk-allocation mechanism in any M&A transaction. They identify what the buyer is paying for; they trigger indemnification when wrong; and they determine the parties' post-closing liability landscape. Disclosure schedules paired with the reps modify the reps with specific exceptions. Companion article: Selling Your Business in Texas Related Terms Disclosure Schedule · Indemnification (M&A) · Basket / Deductible · Indemnification Cap · Sandbagging · Due Diligence Representations and Warranties Insurance (RWI) § 2024 An insurance product covering breaches of representations and warranties in M&A transactions, transferring risk from seller (escrow/holdback) or buyer (direct claims) to an insurer. Buy-side RWI (most common) protects the buyer against losses from breach of seller's reps. Reduces or eliminates traditional escrows and survival periods, smoothing transactions and providing cleaner exits for sellers. Standard in middle-market and larger M&A; available in lower-mid-market through specialized programs. Representations and Warranties Insurance (RWI) is an insurance product covering breaches of representations and warranties in M&A transactions. RWI transfers risk from the parties (typically held by sellers via escrow/holdback or by buyers via direct claims) to an insurer. The product has expanded dramatically since the early 2010s, once a niche tool, RWI is now standard in middle-market and larger M&A, and increasingly available in lower-mid-market deals. Buy-side RWI (most common) protects the buyer against losses from breach of seller's reps; sell-side RWI (less common) protects the seller against indemnification claims. Authority RWI is a specialty market product without a single standard form. Major RWI carriers: AIG, Beazley, Liberty, Euclid, Tokio Marine HCC, Berkshire Hathaway Specialty, AXA XL, Hartford. Industry data: significant market growth from approximately $1.5B annual premiums in 2015 to $5B+ in 2024 (varies by source). Underlying transactional law: state-law contract principles governing representations and indemnification provisions; Delaware General Corporation Law; Texas Business Organizations Code ( Tex. Bus. Orgs. Code §§ 10.001-10.007 ) for Texas-domiciled targets. Federal tax treatment: complex; allocation between premium and coverage affects deductibility and basis treatment. Buy-side RWI structure Buy-side RWI is the most common structure (90%+ of RWI in current market). Standard structure: (1) insured , buyer (and typically buyer's affiliates); (2) covered persons , the buyer's claims for breach of representations and warranties in the purchase agreement; (3) policy limits , typically 10-30% of transaction value; (4) retention , typically 0.5-1% of transaction value, often dropping to 0.25-0.5% after 12 months; (5) policy period , 3 years for general reps, 6+ years for fundamental reps and tax; (6) premium , typically 2-4% of policy limit; varies by industry, deal size, and risk profile. Sell-side RWI structure Sell-side RWI (less common, ~10% of market) protects the seller against indemnification claims under the purchase agreement. Sell-side is most useful where the buyer insists on substantial indemnification but the seller wants to receive sale proceeds without holdback. Sell-side covers the seller for indemnification payments to the buyer, effectively converting the buyer's claim against seller into a claim against the seller's insurer. Sell-side coverage excludes seller's actual knowledge or fraud (standard) and does not cover intentional misrepresentation. Sell-side is more expensive than buy-side because of moral hazard concerns. Deal benefits RWI provides multiple deal benefits: (1) reduced or eliminated escrow , RWI replaces or substantially reduces traditional 10-15% indemnification escrows; (2) cleaner seller exit , sellers receive more proceeds at closing without indemnification overhang; (3) simplified survival , RWI provides longer effective survival than typical 12-18 month seller indemnification; (4) buyer protection against insolvent sellers , particularly valuable for distressed-seller acquisitions; (5) smoothed negotiation , RWI removes a significant negotiation friction point (indemnification scope and survival); (6) private equity fund considerations , particularly valuable for PE sellers wanting to close funds and distribute proceeds. Standard exclusions Standard RWI exclusions (varying by carrier): (1) known issues , matters disclosed in the data room or specifically known; (2) specific identified matters , disclosed risks identified during underwriting; (3) covenants and other agreements , RWI covers reps and warranties only, not covenants, indemnities, or other agreements; (4) purchase price adjustments , working capital, NWC adjustments handled separately; (5) certain tax matters , pre-closing tax indemnification typically excluded (though tax insurance available separately); (6) environmental beyond scope , environmental reps may be sublimited or excluded; (7) forward-looking statements , projections and forecasts; (8) specific industry risks , sector-specific exclusions for high-risk industries (cannabis, crypto, certain regulated businesses); (9) fraud , actual fraud excluded. Underwriting process RWI underwriting requires substantial diligence: (1) application and information , broker submits application, financial information, transaction documents; (2) underwriting call , initial discussion with carrier on deal structure and risks; (3) diligence review , carrier reviews buyer's diligence reports, data room, transaction documents; (4) underwriting questions , written follow-up on identified issues; (5) policy negotiation , exclusions, retention, limits, definitions; (6) binding , coverage typically bound at signing or before closing. Typical timeline: 2-4 weeks from initial submission to bound coverage. Quality underwriting requires comprehensive diligence, RWI is not a substitute for diligence but a complement that prices residual risk. Claims process RWI claims process: (1) claim notification , insured notifies carrier of potential claim; (2) claim documentation , facts of breach, calculation of damages; (3) carrier investigation , carrier reviews claim and underlying issues; (4) defense or settlement , for third-party claims, carrier may control defense; for direct loss claims, carrier evaluates and pays. Typical claim timeline: 6-18 months for resolution. Claim payments tend to cluster in specific categories: financial statement reps, tax reps, compliance, intellectual property, employment. Industry data shows ~20% of policies have at least one claim notification. Coordination with traditional indemnification RWI coordinates with traditional purchase agreement indemnification: (1) RWI as primary , buyer claims first proceed against insurer; (2) seller indemnification as backstop , typically below RWI retention or for excluded items; (3) fundamental reps , often have separate seller indemnification regardless of RWI (capped at purchase price for fundamentals); (4) specific indemnification , pre-closing taxes, identified litigation, regulatory matters often handled by direct seller indemnification; (5) fraud carve-out , sellers remain liable for fraud regardless of RWI. Sophisticated transaction documents coordinate RWI with tailored indemnification to address all risk categories. Practical context For Texas M&A transactions in the middle market and above, RWI is increasingly standard. Best practice: (1) for buyers, engage RWI broker early in diligence, at least 2-3 weeks before signing; (2) for sellers, evaluate RWI economics, typical breakeven is 0.5-1% of deal value in retained risk; (3) coordinate RWI with traditional indemnification, RWI replaces but does not eliminate need for tailored indemnification on specific risks; (4) negotiate exclusions carefully, broad exclusions defeat coverage; (5) maintain comprehensive diligence quality, underwriting depends on diligence; (6) consider tax insurance separately for material tax issues; (7) document underwriting communications carefully, claims defense often turns on what was disclosed during underwriting. Common gaps: parties assume RWI covers everything in the purchase agreement and reduce indemnification accordingly, leaving uncovered exposure on covenants, specific risks, and forward-looking matters. RWI is part of a comprehensive risk allocation, not a complete substitute. Companion article: Selling Your Business Related Terms Indemnification (M&A) · Indemnification Cap · Representations and Warranties · Disclosure Schedule · Sandbagging Reservation of Rights § An insurer's notice to its insured that, while the insurer is providing defense, it reserves the right to deny indemnification (or specific coverage positions) based on policy provisions, exclusions, or factual developments. Common in cases involving partial coverage, allocation issues, or developing facts. The reservation preserves the insurer's coverage defenses while still defending under the policy. Triggers specific procedural rights for the insured under Texas law, including potentially the right to independent counsel. A reservation of rights is an insurer's notice to its insured that, while the insurer is providing defense under the policy, the insurer reserves the right to deny coverage (in whole or in part) based on policy provisions, exclusions, or factual developments. Reservation of rights is the standard insurer practice when there is potential coverage but also potential defenses to indemnification. The insurer continues to defend (avoiding bad-faith risk) while preserving coverage defenses for resolution at the indemnity stage. Texas law gives reservation of rights specific procedural consequences, including potentially triggering the insured's right to independent counsel. Authority Foundational Texas case on reservation and independent counsel: Northern County Mut. Ins. Co. v. Davalos , 140 S.W.3d 685 (Tex. 2004); Heyden Newport Chemical Corp. v. Southern Gen. Ins. Co. , 387 S.W.2d 22 (Tex. 1965). The eight-corners rule for duty to defend: GuideOne Elite Ins. Co. v. Fielder Road Baptist Church , 197 S.W.3d 305 (Tex. 2006); Richards v. State Farm Lloyds , 597 S.W.3d 492 (Tex. 2020) (modifying eight-corners rule to permit consideration of certain extrinsic evidence in narrow circumstances). Statutory framework: Tex. Ins. Code Ch. 541 (unfair claim settlement practices apply to defense and reservation conduct). Why insurers reserve rights Common circumstances triggering reservation of rights: (1) some allegations within coverage, others outside , petition includes covered and uncovered claims; (2) coverage exclusions potentially apply , based on facts that may or may not be established; (3) insured's prior knowledge , claim may be subject to prior-knowledge exclusion; (4) policy limits and allocation , multiple insureds, multiple claims, multiple policies require allocation; (5) fraud or intentional acts , exclusions may apply if certain conduct is established; (6) policy condition compliance , insured's compliance with notice, cooperation, or other conditions in question; (7) scope of professional services , for E&O, whether the conduct falls within covered services. Reserving rights protects the insurer's coverage defenses while complying with the duty to defend. The eight-corners rule Texas applies the "eight-corners rule" to the duty to defend: comparing the four corners of the petition to the four corners of the policy. If allegations in the petition state a potentially-covered claim, the insurer must defend the entire suit, even if other allegations are outside coverage. The rule is plaintiff-friendly: the duty to defend can attach even where ultimate indemnification is unlikely. Richards v. State Farm Lloyds (Tex. 2020) modified the rule to permit consideration of extrinsic evidence in narrow circumstances (where the evidence is undisputed, doesn't conflict with petition allegations, and goes solely to coverage rather than the merits of the underlying claim). Procedural mechanics Reservation of rights typically follows specific procedural mechanics: (1) tender of defense , insured tenders the claim to the insurer; (2) insurer review , coverage and defense analysis; (3) reservation letter , written letter from insurer agreeing to defend but reserving specific coverage defenses; (4) defense provision , insurer provides defense, typically through its panel counsel; (5) continuing reservation , insurer monitors developments and may modify or expand reservation; (6) coverage adjudication , declaratory judgment action or coverage adjudication separately from underlying suit. The reservation letter must identify the specific coverage issues with reasonable specificity; vague reservations may be ineffective. Triggering independent counsel, the Davalos rule Northern County Mut. Ins. Co. v. Davalos (Tex. 2004) is the controlling Texas case on independent counsel. The court held that an insured is entitled to independent counsel (paid by the insurer) when there is a conflict of interest between the insurer's coverage interests and the insured's defense interests. Common triggering circumstances: (1) petition alleges both covered and uncovered conduct , defense counsel could steer the case toward outcomes favorable to the insurer's coverage position; (2) punitive damages at issue (often uninsurable); (3) insured's intent or knowledge at issue (often basis for coverage exclusion). Where independent counsel is triggered, the insured selects counsel of its choice (often subject to insurer reasonableness review of rates). Insured's options when rights are reserved Insured's response options to reservation of rights: (1) accept defense under reservation , most common; insured accepts defense knowing coverage may be denied; (2) request independent counsel , when conflict triggers Davalos; (3) reject defense and provide own defense , if insured believes the reservation is improper or wants more control; insured may pursue reimbursement separately; (4) file declaratory judgment action , to resolve coverage issues separately from underlying suit; (5) seek modification of reservation , challenge specific reservations as unsupported. The choice depends on the strength of coverage defenses, conflict assessment, and strategic considerations. Bad-faith implications Improper reservation can expose the insurer to bad-faith liability: (1) reserving rights without basis , reservation must be supported by facts and policy provisions; (2) using reservation to limit defense quality , defense must be reasonable regardless of reservation; (3) failure to update reservation , circumstances change; reservations should be updated or withdrawn as facts develop; (4) reservation followed by improper denial , if reservation was used to set up coverage denial without good-faith basis. Tex. Ins. Code Ch. 541 applies to reservation conduct as much as to denial conduct. Reservation vs. denial vs. coverage by estoppel Critical distinctions: (1) reservation of rights , insurer defends and reserves coverage defenses; coverage may still be denied; (2) denial of coverage , insurer refuses to defend or indemnify; insured pursues defense independently with potential for coverage suit; (3) coverage by estoppel , historical doctrine where insurer that defended without reservation could be estopped from later denying coverage; modern Texas law has narrowed this doctrine, but failure to reserve rights properly can still impact later coverage positions. Best practice for insurers: reserve rights promptly, with specificity, and update as facts develop. Best practice for insureds: respond to reservation with informed assessment of coverage issues and conflict considerations. Practical context For Texas commercial parties responding to claims and litigation, reservation of rights letters require careful analysis. Best practice for insureds: (1) read the reservation carefully, identify specific coverage issues; (2) evaluate Davalos conflict considerations, independent counsel may be available; (3) consider whether coverage adjudication should be pursued separately (declaratory judgment); (4) maintain communication with insurer through coverage counsel; (5) preserve evidence on coverage issues during underlying defense; (6) for material coverage disputes, engage independent coverage counsel even if insurer-paid defense counsel handles underlying claim. Best practice for insurers: reserve promptly with specificity; update as facts develop; ensure defense quality is unaffected by reservation; coordinate coverage and defense strategy. Common pitfalls: insureds accepting reservation without recognizing Davalos rights; insurers issuing boilerplate reservations without specific analysis. Coverage counsel review is high-value when reservation issues are material. Related Terms Commercial General Liability Insurance · Stowers Doctrine · Texas Insurance Code Chapter 541 · Declaratory Judgment · Directors and Officers Insurance Restrictive Covenant § A privately-imposed limitation on the use of real property, typically arising from a deed restriction or recorded declaration governing a subdivision, planned community, or condominium. Texas restrictive covenants are interpreted under common-law principles supplemented by the Texas Property Owners' Association Act and related statutes. Distinct from employment-context restrictive covenants (noncompete, nonsolicit) covered separately. A restrictive covenant is a privately-imposed limitation on the use of real property, typically arising from a deed restriction or recorded declaration of covenants, conditions, and restrictions (CC&Rs) governing a subdivision, planned community, or condominium. Restrictive covenants run with the land and bind subsequent owners; they are the principal mechanism through which residential and commercial developments maintain consistent character, design standards, and use limitations over time. The term is also used in the employment context to describe noncompete and nonsolicitation agreements, which are addressed separately. Authority Texas Property Owners' Association Act: Tex. Prop. Code Ch. 209 (residential subdivisions). Condominium Act: Tex. Prop. Code Ch. 81-82 . Uniform Condominium Act: Ch. 82 . Discriminatory provisions void: Tex. Prop. Code § 5.026 . Construction of restrictive covenants: Tex. Prop. Code Ch. 202 ; § 202.003 (covenants liberally construed to give effect to purpose). Attorney's fees recovery: Tex. Prop. Code § 5.006 (prevailing party in breach-of-restrictive-covenant action). Creation and enforcement Restrictive covenants are created by recordation of a written declaration in the real property records of the county where the property is located. They bind the original developer's parcels and all subsequent purchasers in the development. Enforcement is typically through (1) injunctive relief preventing or undoing a covenant violation; (2) declaratory judgment establishing the covenant's meaning; (3) monetary damages for breach; (4) self-help remedies under the declaration. The Texas Property Owners' Association Act provides additional enforcement procedures and protections for residential subdivisions. Typical content Common restrictive covenants in residential and commercial developments include: (1) use restrictions , single-family residential only, no commercial activity, no short-term rentals; (2) architectural restrictions , minimum/maximum square footage, exterior materials, color schemes, roofing types; (3) setback and density requirements ; (4) landscape requirements ; (5) signage restrictions ; (6) livestock and animal restrictions ; (7) vehicle and parking restrictions ; (8) HOA membership and assessment obligations ; (9) architectural review committee approval requirements ; (10) amendments procedures requiring supermajority votes. Construction principles Texas common law historically construed restrictive covenants strictly against the party seeking to enforce them, favoring free use of property, but Section 202.003 reverses that presumption for covenants in residential real estate developments, requiring liberal construction "to give effect to its purposes and intent." For commercial covenants and older residential covenants, the strict-construction rule may still apply. Ambiguities are typically resolved by reference to the declaration's stated purposes and the surrounding circumstances of its adoption. Termination and modification Restrictive covenants can be modified or terminated by (1) compliance with amendment procedures in the declaration (typically supermajority owner vote); (2) expiration of stated term; (3) merger with the dominant estate; (4) abandonment (rarely successful, requires showing of widespread non-compliance evincing community intent to abandon); (5) waiver by repeated non-enforcement of similar violations (estoppel); (6) changed conditions (rarely successful in Texas); (7) judicial action. Statutory limits Several types of restrictive-covenant provisions are unenforceable as a matter of Texas statute: (1) discriminatory restrictions based on race, color, national origin, religion ( § 5.026 ); (2) restrictions on flag display under specified conditions; (3) restrictions on certain solar collectors; (4) restrictions on fostering and adoption of children; (5) restrictions on rainwater harvesting devices; (6) various other narrow statutory exemptions enacted over the years. Enforcement of clearly unenforceable provisions can expose the HOA or developer to attorney's fees and damages. Practical context For Texas commercial property buyers in restricted developments (office parks, retail centers, master-planned communities), the restrictive covenants are typically the second most important title document after the deed itself. Buyers should (1) review every recorded restriction; (2) confirm planned use is compatible; (3) understand HOA assessment levels and reserve adequacy; (4) review architectural review process for any planned construction; (5) confirm amendment thresholds and existing amendment activity. For residential buyers, the same review applies plus particular attention to short-term rental, home-business, and vehicle/RV restrictions that increasingly drive HOA disputes. Related Terms Deed · Easement · Commercial Real Estate Purchase Agreement · Noncompete Agreement · Title Insurance Retainage § 2022 A portion of each construction payment withheld by the owner (or upper-tier contractor) until project completion to ensure performance and provide a fund for subcontractor lien claims. Texas requires owners to reserve 10% of payments to original contractors for 30 days after final completion under Tex. Prop. Code § 53.101. Post-HB 2237, the term "retainage" applies only to contractual retainage; owner-withheld funds are now "reserved funds." Retainage is a portion of each construction payment withheld by the owner (or by an upper-tier contractor from a subcontractor) until project completion. Retainage serves dual purposes: (1) ensuring the contractor or subcontractor's continued performance through final completion; and (2) providing a fund from which lien claims and final-completion items can be paid. Texas law requires owners to reserve 10% of payments to original contractors for 30 days after final completion. House Bill 2237 (effective January 1, 2022) reformed the terminology, what was previously called "statutory retainage" is now "reserved funds," and "retainage" now refers only to contractual retainage held within the contracting chain. Authority Reserved funds (formerly statutory retainage): Tex. Prop. Code § 53.101 (funds required to be reserved); § 53.102 (payment secured by reserved funds); § 53.103 (lien on reserved funds); § 53.104 (preferences); § 53.105 (owner's liability for failure to reserve funds). Contractual retainage (claimant retainage notice): § 53.057 . Post-HB 2237 amendments: 87th Leg. (2021), eff. Jan. 1, 2022, applicable to original contracts entered on or after that date. Owner's reserved funds obligation (post-HB 2237) Section 53.101 requires the owner of property being improved to retain 10% of the contract price (or value of the work performed if no contract price) during the progress of the work. The reserved funds must be held for 30 days after final completion, termination, or abandonment of the original contract, providing a window during which subcontractors can perfect lien claims against the reserved funds before they are released to the original contractor. Owner's liability for failure to reserve If the owner fails to maintain the required reserved funds, the owner becomes personally liable to qualified lien claimants for the amount that should have been reserved, up to the reserved-funds amount. Section 53.105 makes this liability direct and personal, it does not require the claimant to first exhaust remedies against the original contractor. This is one of the few circumstances under Texas law where an owner is personally liable to subcontractors with whom the owner has no direct contract. Contractual retainage "Contractual retainage" refers to amounts withheld within the contracting chain, typically 10% withheld by the original contractor from each progress payment to subcontractors, and similar withholdings down the chain. These are governed by the underlying contract, not by § 53.101. Subcontractors claiming a lien for contractual retainage must serve a § 53.057 notice and meet the retainage-specific lien-filing deadline (15th day of the 3rd month after the original contract was completed, terminated, or abandoned), which can differ from the general lien-filing deadline. Release timing Reserved funds are released to the original contractor at the end of the 30-day post-completion window, assuming no perfected lien claims against the funds. Contractual retainage is released according to the underlying subcontract terms, typically tied to substantial completion of the subcontractor's work plus delivery of close-out items (warranties, as-built drawings, lien releases). Texas law does not impose a maximum retainage rate, but most commercial contracts cap retainage at 10% with reduction (often to 5%) at substantial completion. Common disputes Recurring retainage disputes include: (1) whether substantial completion has occurred and triggered reduction; (2) whether final completion has occurred and triggered release; (3) whether the contractor has cured punch-list items entitling release; (4) whether subcontractor lien claims against retainage are valid; (5) interaction between reserved funds release and outstanding lien claims; (6) whether retainage was wrongfully withheld (potentially triggering Prompt Payment Act interest). Practical context For Texas owners, the reserved-funds obligation is a meaningful compliance burden, the 10% reservation must be tracked through the project life cycle, and failure to maintain reserved funds creates personal liability to subcontractors. Best practice: separate accounting for reserved funds throughout the project, with formal release procedures at the 30-day post-completion mark. For subcontractors, retainage claims against reserved funds are often the only meaningful payment recovery when the original contractor fails, the § 53.057 notice and retainage-specific lien-filing deadline must be calendared and met. Related Terms Mechanic's and Materialman's Lien · Construction Contract · Texas Prompt Payment Act · Affidavit of Completion · Pay-When-Paid vs. Pay-If-Paid Reverse Merger § A merger structure (most commonly "reverse triangular") in which the target entity survives and the acquirer's subsidiary is the disappearing entity. Economically equivalent to a stock purchase but provides specific tax, contractual, and regulatory advantages. A reverse merger (sometimes called a "reverse triangular merger" in its most common form) is a merger structure in which the target entity survives the merger and the acquirer's subsidiary is the disappearing entity. The economic effect is identical to a stock purchase, the target's equity is exchanged for the buyer's consideration and the target becomes a wholly-owned subsidiary of the buyer, but the merger structure provides specific tax, contractual, and regulatory advantages. Authority Tex. Bus. Orgs. Code §§ 10.001–10.010 (mergers); § 10.005 (short-form mergers); §§ 10.151–10.156 (filing). Reverse triangular merger structure The buyer forms a wholly-owned merger subsidiary ("MergerCo"). MergerCo merges with and into the target, with the target as the surviving entity. The target's shareholders receive the merger consideration; their target shares are cancelled; MergerCo's shares (held by the buyer) are converted into the target's surviving equity. The result: target is now a wholly-owned subsidiary of the buyer. Why use the structure Continuity of contracts. The target survives, so contracts with change-of-control provisions triggered by acquisition may not be triggered by a reverse merger (depending on contract language). This is the principal practical advantage. Tax treatment. A reverse triangular merger using buyer voting stock can qualify as a tax-free "B reorganization" under IRC § 368(a)(1)(B) (or § 368(a)(2)(E) ), permitting tax-free treatment for target shareholders. Regulatory and licensing. Where target holds licenses or permits non-transferable on transfer of equity but unaffected by survival of the target entity, reverse merger preserves the licenses. Forward merger distinguished A "forward triangular merger" uses the same triangular structure but has the target merge into MergerCo (so MergerCo survives, target disappears). Tax and contract continuity considerations differ, forward triangular mergers receive different IRC treatment and do not preserve target's contracts. Practical context Reverse triangular mergers are the dominant Texas M&A structure for acquisitions of corporate targets where (a) the buyer wants the operational continuity of a stock purchase and (b) the target's contract portfolio includes meaningful change-of-control provisions that survival of the target may avoid. Companion article: Selling Your Business in Texas Related Terms Merger · Stock Purchase · Asset Purchase · Conversion Right of First Refusal (ROFR) § A contractual right giving the holder the option to purchase property or interests at the same terms offered by a third party, before the seller can complete the third-party transaction. Standard in stockholder agreements, real estate, and partnership contexts to control who can become an owner. Distinguishable from Right of First Offer (ROFO), ROFO requires seller to offer to holder first; ROFR requires holder to match third-party offer. A Right of First Refusal (ROFR) is a contractual right giving the holder the option to purchase property or interests at the same terms offered by a third party, before the seller can complete the third-party transaction. ROFRs are standard in stockholder agreements, real estate contracts, and partnership arrangements to control who can become an owner. The economic structure: seller obtains bona fide third-party offer, presents it to ROFR holder, holder elects to match (and purchase) or decline (allowing third-party transaction). ROFRs are distinguishable from Rights of First Offer (ROFO), ROFO requires seller to offer to holder first. Authority State law: governed by general contract and property law. Texas: Tex. Prop. Code § 5.014 (specific to real estate ROFR notices); general Texas contract law. ROFR enforceability cases: FH Partners, LLC v. Complete Home Concepts, Inc. , 326 S.W.3d 871 (Tex. App.-Fort Worth 2010, no pet.); Tenneco, Inc. v. Enterprise Products Co. , 925 S.W.2d 640 (Tex. 1996) (ROFR triggered by mergers/restructurings). Standard ROFR mechanics Typical ROFR provision flow: (1) seller solicits or receives offer from third party; (2) seller obtains bona fide offer with specified terms; (3) seller delivers notice to ROFR holder including offer terms; (4) response period , typically 15-60 days for holder to elect; (5) match , holder agrees to purchase at same terms; (6) decline , holder declines; seller may complete third-party transaction on same or substantially same terms; (7) re-offer if material terms change. The mechanics ensure ROFR holder receives genuine opportunity to purchase. ROFR vs. ROFO Distinct rights with different economic implications: (1) ROFR (Right of First Refusal) , seller must obtain third-party offer first, then offer to holder at those terms; (2) ROFO (Right of First Offer) , seller must offer to holder first at specified or negotiated price, before approaching third parties. ROFO is generally more seller-friendly (no need to involve third parties in price discovery if holder is interested). ROFR is more buyer-friendly (objective market price discovery; holder doesn't need to commit before knowing market value). Common ROFR contexts ROFRs appear in: (1) stockholder agreements , restricting transfers of stock; (2) LLC operating agreements , limiting member transfers; (3) real estate , rights to purchase real property; (4) commercial leases , tenant rights to purchase landlord's property; (5) partnership agreements , controlling partner exit; (6) investor side letters , VC ROFR on subsequent sales; (7) licensing agreements , IP licensee rights to acquire IP if licensor sells. Each context has distinct considerations. Triggering events ROFR triggering events typically include: (1) proposed sale to third party; (2) change of control of seller in some structures; (3) transfer to specified parties (sometimes excluded, family transfers, trust transfers); (4) merger or restructuring , case-specific; Tenneco v. Enterprise Products (Tex. 1996) addressed mergers as triggering events. Drafting precision is critical, courts construe triggers narrowly. Common gaps: change-of-control of upstream entities, transfers to affiliates. Drafting issues Recurring ROFR drafting issues: (1) "same terms" requirement , strict matching vs. economic equivalent; (2) specific performance availability , typically yes for unique property; (3) response period , too short impractical; too long delays seller; (4) notice requirements , what information must be provided; (5) excluded transfers , family, estate planning, affiliate transfers commonly excluded; (6) deemed offer requirements , parties' obligations to seek genuine third-party offers; (7) survival , duration of ROFR; (8) damages , typically specific performance plus possible damages. Common pitfalls Frequent ROFR enforcement issues: (1) structured transactions , sales structured as mergers, recapitalizations, or asset transfers to avoid ROFR; (2) collusive offers , third party offer manipulated to deter ROFR exercise; (3) change-of-control workarounds , selling parent of seller rather than selling property directly; (4> multiple-asset bundling , third party offer includes assets ROFR doesn't cover, complicating "same terms" analysis; (5) side payments and structures outside the formal transaction. Practical context For Texas commercial parties, ROFR drafting and enforcement requires careful attention. Best practice: (1) draft triggering events broadly to capture indirect transfers, mergers, restructurings; (2) specify "same terms" precisely, including non-cash consideration; (3) set reasonable response period (30-45 days typical); (4) include specific performance remedy; (5) provide adequate notice content requirements; (6) for ROFR holders, monitor seller activities for triggering events; (7) document compliance carefully. For sellers: (1) document third-party offers carefully; (2) provide proper notice with all required information; (3) preserve evidence of bona fide third-party negotiations; (4) consider ROFO vs. ROFR trade-offs at agreement formation. Common pitfall: ROFR provisions that fail to address mergers or change-of-control transactions, allowing sophisticated parties to circumvent. Related Terms Buy-Sell Agreement · Tag-Along/Drag-Along Rights · Shareholder · Commercial Lease · Preferred Stock Royalty § A payment from a licensee to a licensor in consideration for the use of intellectual property. Common structures include running royalties (percentage of revenue or per-unit), lump-sum or paid-up royalties, minimum annual royalties, and milestone payments. Royalty base, deductions, audit rights, and reporting cadence are heavily negotiated. A royalty is a payment from a licensee to a licensor in consideration for the use of licensed intellectual property. Royalty terms are a primary economic dimension of any license agreement. The four critical negotiation points are (1) royalty base, the dollar amount or unit count to which the rate applies; (2) royalty rate, the percentage or per-unit amount; (3) permitted deductions; and (4) audit and reporting mechanics. Authority General Texas contract law. UCC Article 2 may apply to royalty obligations on goods ( Tex. Bus. & Com. Code Ch. 2 ). Patent royalty principles: 35 U.S.C. § 284 (reasonable royalty as floor for damages); Brulotte v. Thys Co. , 379 U.S. 29 (1964) (royalties may not extend beyond patent expiration); reaffirmed in Kimble v. Marvel Entertainment, LLC , 576 U.S. 446 (2015). Trademark royalties tied to quality control: 15 U.S.C. § 1127 . Royalty structures Common structures include: running royalty , a percentage of net sales or a per-unit payment, payable quarterly or annually based on actual sales activity; lump-sum or paid-up royalty , a single payment buying perpetual rights, eliminating ongoing reporting; milestone royalty , payment triggered by specified events (regulatory approval, first commercial sale, sales-volume thresholds); minimum annual royalty , a floor payment regardless of actual sales, common in exclusive licenses to maintain incentive; and tiered royalty , rate varies with sales volume. Royalty base, net sales vs. gross The royalty base provision is heavily negotiated. Licensors typically prefer gross revenue or list price as the base; licensees prefer net sales, gross revenue minus enumerated deductions for returns, allowances, discounts, freight, taxes, and packaging. The deductions list should be exhaustively defined; an open-ended "or other reasonable deductions" clause is a recipe for dispute. Affiliate-transfer pricing and intercompany sales should be addressed explicitly to prevent royalty avoidance through structure. Audit and reporting Standard practice: licensee delivers a royalty report each quarter or year showing units sold, revenue, deductions, and royalty due, accompanied by payment. Licensor retains audit rights at its expense, with cost-shifting to the licensee if the audit identifies an underpayment exceeding a stated threshold (typically 5%). Audit rights survive termination of the license for a stated tail period (typically two to three years) to allow review of the final royalty period. Patent-specific limits Under Brulotte and Kimble , patent royalties may not extend beyond the expiration of the last licensed patent. Royalty agreements that extract payment for use occurring after expiration are unenforceable as to that portion. Licensors with patent-and-trade-secret hybrid arrangements typically structure separate royalty obligations for each, allowing the trade-secret royalty to continue indefinitely. Practical context Royalty disputes are among the most common license-agreement disputes that reach litigation. Most are avoidable through tighter drafting: specific deductions list, defined "net sales" with no residual category, mandatory affiliate-transfer pricing, and detailed audit mechanics. Licensors should also resist accepting "best efforts" or "commercially reasonable efforts" obligations as a substitute for minimum royalty floors, performance covenants without dollar floors create constant litigation risk over what efforts were reasonable. Related Terms License Agreement · IP Assignment · Patent · Trademark · Representations and Warranties Rule 10b-5 § SEC rule (17 C.F.R. § 240.10b-5) implementing Section 10(b) of the Securities Exchange Act of 1934. Prohibits material misrepresentations and omissions in connection with the purchase or sale of any security. The principal federal anti-fraud provision; applicable to public and private securities transactions. Foundational basis for securities fraud class actions, SEC enforcement, and private rescission claims. Six required elements: material misrepresentation/omission, scienter, connection with security purchase/sale, reliance, economic loss, loss causation. Rule 10b-5 is the SEC rule implementing Section 10(b) of the Securities Exchange Act of 1934, the principal federal anti-fraud provision in U.S. securities law. Rule 10b-5 prohibits material misrepresentations and omissions in connection with the purchase or sale of any security. The rule applies to both public and private securities transactions and provides the foundation for securities fraud class actions, SEC enforcement, and private rescission claims. Rule 10b-5 has spawned vast case law over decades; understanding the rule is essential to securities practice and corporate disclosure. Authority SEC rule: 17 C.F.R. § 240.10b-5 . Statutory basis: 15 U.S.C. § 78j(b) (Securities Exchange Act § 10(b)). Foundational cases: Ernst & Ernst v. Hochfelder , 425 U.S. 185 (1976) (scienter requirement); Basic Inc. v. Levinson , 485 U.S. 224 (1988) (materiality and fraud-on-the-market); Dura Pharmaceuticals, Inc. v. Broudo , 544 U.S. 336 (2005) (loss causation); Stoneridge Investment Partners v. Scientific-Atlanta , 552 U.S. 148 (2008) (scheme liability limits); Janus Capital Group v. First Derivative Traders , 564 U.S. 135 (2011) (who "makes" a statement); Halliburton Co. v. Erica P. John Fund , 573 U.S. 258 (2014) (price impact at class certification). The six elements of a Rule 10b-5 claim Private Rule 10b-5 claims require six elements: (1) material misrepresentation or omission , false statement or omission of material fact; (2) scienter , intent to deceive, manipulate, or defraud (recklessness sufficient in most circuits); (3) connection with purchase or sale of security ; (4) reliance , plaintiff relied on the misrepresentation (presumed under fraud-on-the-market for public securities); (5) economic loss ; (6) loss causation , connection between misrepresentation and economic loss. SEC enforcement and criminal claims have similar elements but no private-party reliance requirement. Materiality Materiality is judged by whether a reasonable investor would consider the information important in making investment decisions. Basic v. Levinson articulated the standard: information is material if there is a "substantial likelihood that a reasonable shareholder would consider it important." Materiality is fact-specific: (1) quantitative , magnitude of financial impact; (2) qualitative , nature of information regardless of magnitude; (3) contextual , what reasonable investor would care about given specific circumstances. Common materiality issues: M&A negotiations, earnings projections, regulatory issues, accounting issues, executive misconduct. Scienter, Hochfelder framework Ernst & Ernst v. Hochfelder established the scienter requirement: Rule 10b-5 requires "intent to deceive, manipulate, or defraud." Most circuits permit recklessness to satisfy scienter, defined as "highly unreasonable" conduct involving "an extreme departure from standards of ordinary care." Negligence is insufficient. Pleading scienter under PSLRA requires "strong inference" of scienter, specific facts, not conclusory allegations. Common scienter evidence: (1) red flags ignored; (2) personal stock sales by insiders; (3) prior similar misconduct; (4) compelling circumstantial evidence of awareness. Reliance and fraud-on-the-market Basic v. Levinson (1988) established the fraud-on-the-market presumption: in efficient markets, public misrepresentations are presumed to affect security prices and investors are presumed to rely on price integrity. This presumption is critical to securities class actions, without it, individual reliance proof would defeat class certification. Halliburton II (2014) confirmed the presumption but allowed defendants to rebut at class certification by showing no price impact. The fraud-on-the-market doctrine applies to publicly-traded securities; private securities claims typically require direct reliance proof. Loss causation, Dura Dura Pharmaceuticals v. Broudo (2005) clarified loss causation: plaintiff must show that the misrepresentation, when corrected, caused the economic loss, not merely that the plaintiff paid an inflated price. Standard plaintiffs proof: (1) corrective disclosure revealed the truth; (2) stock price decline in response; (3) economic loss caused by the price decline. Loss causation requires connecting the truth-revealing event to the price decline; intervening factors (general market decline, unrelated news) can defeat loss causation. Common 10b-5 fact patterns Recurring 10b-5 scenarios: (1) accounting fraud , misstated financials, improper revenue recognition; (2) misleading projections , earnings guidance, growth forecasts; (3) concealed material risks , regulatory issues, product defects; (4) insider trading , trading on material nonpublic information; (5) misleading M&A disclosures ; (6) concealed executive misconduct ; (7) misleading product claims ; (8) cybersecurity disclosure failures (post-2018 SEC guidance and 2023 disclosure rules); (9) failure to disclose material related-party transactions ; (10) misleading ESG disclosures (emerging area). SEC enforcement and criminal liability Rule 10b-5 violations support: (1) SEC civil enforcement , disgorgement, civil penalties, injunctive relief, officer/director bars; (2) DOJ criminal prosecution for willful violations; criminal penalties under § 32 of Exchange Act; (3) private securities class actions ; (4) private individual actions . The multi-front enforcement creates substantial exposure, single misconduct can generate parallel SEC, DOJ, and private actions with cumulative penalties and damages. PSLRA and Rule 10b-5 The Private Securities Litigation Reform Act of 1995 (PSLRA) imposed heightened pleading standards for securities class actions: (1) specific allegations , facts required, not conclusions; (2) strong inference of scienter , particularized facts giving rise to strong inference of fraudulent intent; (3) discovery stay , pending motion to dismiss; (4) safe harbor for forward-looking statements with meaningful cautionary language. PSLRA substantially elevated pleading bar for securities class actions; most fail at motion to dismiss stage. Practical context For Texas issuers and individuals, Rule 10b-5 compliance is foundational. Best practice: (1) maintain comprehensive disclosure controls and procedures; (2) train executives and finance personnel on 10b-5 issues; (3) review forward-looking statements with PSLRA safe harbor in mind, meaningful cautionary language; (4) maintain insider trading policies and trading windows; (5) coordinate disclosure timing, no selective disclosure; (6) document basis for material disclosures contemporaneously; (7) for private offerings, maintain comprehensive PPM and subscription documentation supporting anti-fraud defenses; (8) coordinate with D&O insurance for executive protection. For investors: (1) preserve evidence of misrepresentations contemporaneously; (2) coordinate with securities counsel for material claims; (3) understand class action vs. individual action trade-offs; (4) calendar SOL, generally 2 years from discovery, 5 years from violation. Common pitfall: executives speaking publicly without recognizing 10b-5 implications, informal statements at conferences, interviews, or social media create liability if material and inaccurate. Related Terms Regulation D · Private Placement Memorandum · Texas Securities Act · Directors and Officers Insurance · Fiduciary Duty Rule 11 Agreement § An agreement between parties or attorneys in pending litigation regarding any matter touching the suit, made enforceable under Tex. R. Civ. P. 11. To be enforceable, the agreement must be (a) in writing, signed, and filed with the court papers; or (b) made in open court and entered of record. Rule 11 agreements are routinely used to memorialize settlements, scheduling agreements, discovery agreements, and other procedural arrangements. Padilla v. LaFrance, 907 S.W.2d 454 (Tex. 1995), is the controlling enforcement case. A Rule 11 Agreement is a Texas-specific procedural device that makes an agreement between parties or attorneys in pending litigation enforceable as a matter of law. Codified in Rule 11 of the Texas Rules of Civil Procedure, the device is routinely used to memorialize settlements, scheduling agreements, discovery agreements, and any other procedural arrangement between the parties. Rule 11 imposes formality requirements, the agreement must be in writing and filed, or made on the record in open court, that distinguish it from informal handshake deals. Authority Texas procedural rule: Tex. R. Civ. P. 11 : "Unless otherwise provided in these rules, no agreement between attorneys or parties touching any suit pending will be enforced unless it be in writing, signed and filed with the papers as part of the record, or unless it be made in open court and entered of record." Foundational enforcement case: Padilla v. LaFrance , 907 S.W.2d 454 (Tex. 1995). Email enforcement: Cunningham v. Zurich American Insurance Co. , 352 S.W.3d 519 (Tex. App.-Fort Worth 2011, pet. denied) (email correspondence may satisfy Rule 11). Specific-performance remedy: EZ Pawn Corp. v. Mancias , 934 S.W.2d 87 (Tex. 1996) (Rule 11 agreements specifically enforceable). The two enforcement mechanisms Rule 11 provides two paths to enforceability: (1) writing, signed, and filed , the agreement is in writing, signed by the parties or attorneys, and filed with the court papers; (2) open court entered of record , the agreement is made orally on the record in open court (typically a hearing or trial) and reflected in the record. Either path produces an enforceable agreement. The most common modern path is written agreement signed by counsel and filed with the court, often as an attached exhibit to a motion for entry of judgment or order memorializing the agreement. The Padilla v. LaFrance framework Padilla v. LaFrance , 907 S.W.2d 454 (Tex. 1995), is the foundational Texas Supreme Court case on Rule 11 enforcement. The court held that Rule 11 agreements are enforceable as contracts even if one party later refuses to comply. The proper enforcement procedure is to amend the pleadings to add a breach-of-Rule-11-agreement claim, or to move for judgment on the agreement. Padilla rejected attempts to avoid Rule 11 agreements through subsequent change of position; once memorialized in compliance with Rule 11, the agreement binds the parties. Email and electronic communications Modern Texas case law has addressed whether email correspondence satisfies Rule 11's "writing, signed" requirement. Cunningham v. Zurich (Fort Worth 2011) and similar cases have held that email exchanges containing the parties' agreement, with names or signature blocks indicating attribution, can satisfy Rule 11. The "signature" requirement is satisfied by typed names in email signatures. Filing requires submitting the email exchange to the court, either as part of motion practice or by separate filing memorializing the agreement. Common Rule 11 applications Recurring categories of Rule 11 agreements: (1) settlement , most common; parties memorialize settlement terms with intent to dismiss the case; (2) scheduling , extending deadlines, scheduling depositions, setting briefing schedules; (3) discovery , agreements on document production scope, deposition logistics, expert disclosure timing; (4) protective orders , terms of confidentiality and document handling; (5) case-management , bifurcation, separate trials, consolidated handling; (6) partial agreements , parties agree on specific issues while remaining in dispute on others. Enforcement procedure When a party refuses to honor a Rule 11 agreement, the enforcement procedure depends on the nature of the agreement: (1) settlement Rule 11s , typically enforced by motion for judgment on the agreement, with the court entering judgment incorporating the settlement terms; (2) procedural Rule 11s , enforced through motions to compel compliance with the agreed terms; (3) refused settlement , the non-breaching party may amend pleadings to add a Rule 11 breach claim seeking specific performance or damages. EZ Pawn Corp. v. Mancias (Tex. 1996) confirms that Rule 11 agreements are specifically enforceable. Limitations and challenges Common challenges to Rule 11 agreements: (1) not in writing , oral agreements outside open court are not enforceable as Rule 11s (though may be enforceable on other grounds); (2) not signed , unsigned writings are not Rule 11-enforceable; (3) not filed , agreements not filed with the court papers may not satisfy Rule 11 (though substantial compliance may suffice); (4) essential terms missing , agreements with material gaps may be unenforceable for indefiniteness; (5) no meeting of the minds , fundamental contract-formation issues. Most challenges fail when the agreement was negotiated by counsel and committed to writing. Settlement Rule 11s vs. settlement agreements Many settlements are memorialized through both a Rule 11 (filed with the court) and a separate, more detailed settlement agreement (not necessarily filed). The Rule 11 typically captures essential terms and confirms enforceability under Texas procedural rules; the underlying settlement agreement contains the full operative terms (releases, confidentiality, payment schedules, etc.). The two documents are coordinated, the Rule 11 references the settlement agreement, and the settlement agreement is conditioned on the Rule 11's acceptance. Practical context For Texas commercial litigants, the Rule 11 device is foundational to settlement and procedural agreement enforcement. Best practice: (1) memorialize all agreements with opposing counsel in writing, emails are typically sufficient if they contain signed-name attribution; (2) for settlements, immediately file the Rule 11 with the court and follow up with comprehensive settlement agreement; (3) for procedural agreements (scheduling, discovery), file the Rule 11 promptly so the court has notice; (4) use clear, definite language, vague Rule 11s are subject to indefiniteness challenges; (5) for material settlements, draft both the Rule 11 (essentials) and the settlement agreement (full terms) in coordinated documents. The Rule 11 device is one of Texas civil practice's most useful procedural tools, counsel who don't use it routinely are missing substantial enforceability protection. Related Terms Settlement Agreement · Release · Mediation · Summary Judgment · Sanctions S S-Corporation Election § A federal tax election under Subchapter S of the Internal Revenue Code that allows a qualifying entity to be taxed as a pass-through rather than as a C-corporation. Made on IRS Form 2553. Subject to strict eligibility rules: 100-shareholder cap, single class of stock, only U.S. individuals and certain trusts as shareholders. An S-corporation election is the federal tax election that allows a qualifying corporation or LLC to be taxed under Subchapter S of the Internal Revenue Code rather than as a C-corporation. The S-corp election produces pass-through tax treatment, corporate income, losses, deductions, and credits are allocated to shareholders pro rata on Schedule K-1, while preserving the entity's corporate structure for state-law purposes. The election is made by filing IRS Form 2553 (Election by a Small Business Corporation). Authority Subchapter S: 26 U.S.C. §§ 1361-1379 . Election: 26 U.S.C. § 1362 ; IRS Form 2553. Eligibility requirements: 26 U.S.C. § 1361(b) . Allocation: § 1366 . Termination of election: § 1362(d) . Late-election relief: Rev. Proc. 2013-30 (filing within 3 years and 75 days of intended effective date with reasonable cause). Texas franchise tax applies regardless of S-corp election: Tex. Tax Code Ch. 171 . Eligibility requirements To qualify as an S-corporation, the entity must (1) be a domestic corporation or eligible domestic LLC; (2) have only allowable shareholders, U.S. individuals, certain trusts and estates, and certain tax-exempt organizations (no partnerships, no corporations, no non-resident aliens); (3) have no more than 100 shareholders (with family members counted as one); (4) have only one class of stock (differences in voting rights are permissible; differences in distribution rights are not); and (5) not be an ineligible corporation (certain banks, insurance companies, and possessions corporations). Failure of any requirement at any time terminates the election retroactively to the failure. Filing the election Form 2553 must be filed with the IRS no later than 2 months and 15 days after the beginning of the tax year the election is to take effect (75 days for a calendar-year entity electing for the current year), or at any time during the preceding tax year. All shareholders must consent in writing. Late elections may qualify for relief under Rev. Proc. 2013-30 if the entity intended to be an S-corporation, has filed all required returns consistent with S-corp status, and has reasonable cause for the late filing. Tax consequences Income is allocated pro rata to shareholders based on stock ownership, regardless of distributions. Shareholders pay tax at their individual rates on their distributive shares, even if no cash is distributed. Distributions of previously-taxed income are generally tax-free up to the shareholder's basis. The S-corp does not pay federal income tax (with limited exceptions for built-in gains under § 1374 and excess net passive income under § 1375 in C-corp-converted entities). Reasonable compensation requirement Shareholder-employees must receive reasonable compensation for services rendered to the corporation. The IRS has identified inadequate reasonable compensation as an ongoing audit priority for S-corporations. Distributions characterized as anything other than wages may be reclassified as wages, triggering back FICA, FUTA, penalties, and interest. See Reasonable Compensation Doctrine . When S-corp is the right choice S-corp election is most attractive for: (1) closely-held businesses with U.S. individual owners; (2) businesses generating positive cash flow that owners want to extract; (3) businesses where the FICA savings on the wage-vs-distribution split exceeds the administrative cost; (4) businesses without VC or institutional investor plans. S-corp election is NOT appropriate for businesses planning to seek venture capital, businesses with non-U.S. or institutional shareholders, businesses requiring multiple classes of stock, or businesses qualifying for Section 1202 founder gain exclusion (which requires C-corp status). Practical context For Texas LLCs, the most common path is: form as LLC, file Form 8832 to elect corporate tax treatment, then file Form 2553 to elect S-corp status, or use the simplified path by filing Form 2553 alone, which is treated as both elections. S-corp election should be a deliberate decision after analysis of (1) reasonable compensation feasibility; (2) ownership composition; (3) state-tax implications; (4) exit horizon. Business owners considering S-corp election should run reasonable-compensation analysis before electing, since the post-election reclassification risk is meaningfully larger than the up-front complexity of getting compensation right. Related Terms Pass-Through Entity · C-Corporation Tax Treatment · Reasonable Compensation Doctrine · Schedule K-1 · Section 1202 / Qualified Small Business Stock · Corporation SaaS Agreement § A subscription agreement under which a customer accesses software hosted by the vendor on a recurring-fee basis, rather than installing software locally. Distinct from a software license in that the customer receives a service, not a license to a copy. Typical issues include uptime SLAs, data processing addenda, exit and data-portability provisions, and regulatory compliance. A SaaS (software-as-a-service) agreement is a subscription contract under which a customer accesses software hosted on the vendor's infrastructure for a recurring fee, rather than installing a copy of the software locally. SaaS agreements are services contracts, not licenses to a copy of software. The legal and practical implications differ materially from traditional software licensing. Authority General Texas contract law. Texas Data Privacy and Security Act (TDPSA), Tex. Bus. & Com. Code Ch. 541 , governing controller-processor relationships for personal data. Texas Identity Theft Enforcement and Protection Act, Tex. Bus. & Com. Code Ch. 521 , governing breach notification for sensitive personal information. Sectoral overlays where applicable: HIPAA, 42 U.S.C. § 1320d et seq.; GLBA, 15 U.S.C. § 6801 et seq. Uptime and service level agreements SLAs typically express uptime as a percentage (commonly 99.9% or 99.95%) measured monthly. The remedy for SLA breach is almost always a service credit, a percentage of the monthly fee, rather than monetary damages or termination. Customers should negotiate (1) the measurement method (e.g., excluding scheduled maintenance windows); (2) the cap on credits; (3) the trigger threshold for termination rights; and (4) the cumulative credit ceiling that triggers a refund versus service-credit posture. Data processing and security Where the SaaS vendor processes personal data on the customer's behalf, the customer is the "controller" and the vendor is the "processor" under the TDPSA. The vendor agreement must include a data processing addendum (DPA) addressing the requirements of § 541.104 , including the purpose and duration of processing, the type of personal data, the rights and obligations of the controller, deletion or return of data on termination, and security measures. HIPAA-regulated data requires a Business Associate Agreement; PCI-regulated data requires PCI DSS attestation provisions. Termination and data portability Exit provisions are critical. Standard practice: on termination, the vendor must provide the customer's data in a usable export format (typically CSV, JSON, or the vendor's standard API export) for a defined retrieval window (typically 30-90 days), after which the vendor deletes the customer's data and certifies destruction. Without explicit data-portability provisions, the customer may face vendor lock-in or, worse, data loss on contract expiration. Indemnification and limitation of liability Most SaaS agreements include vendor IP indemnification (against third-party claims that the service infringes IP rights), customer indemnification (against claims arising from customer data or use), and a mutual limitation of liability typically capped at fees paid in the preceding 12 months. Customers handling regulated data should negotiate carve-outs from the liability cap for data-breach indemnification, gross negligence, willful misconduct, and IP indemnification. Practical context SaaS contracts are often presented as non-negotiable click-through "online order forms" tied to the vendor's standard terms. Material customers should resist this posture and negotiate the DPA, security exhibit, SLA, indemnification, and liability cap as a matter of routine. The cost of a one-time negotiation is far smaller than the cost of a downstream breach where the contract terms allocate the consequences against the customer. Related Terms Software License Agreement · Texas Data Privacy and Security Act · License Agreement · Master Service Agreement · Indemnification (Corporate) Sabine Pilot Doctrine § A narrow Texas common-law exception to the at-will employment doctrine, recognized in Sabine Pilot Service, Inc. v. Hauck, 687 S.W.2d 733 (Tex. 1985). An employee may sue for wrongful discharge if the sole reason for termination was the employee's refusal to perform an illegal act that carries criminal penalties. The doctrine is narrowly construed, the act must be criminally illegal, the refusal must be the sole reason for discharge. One of few common-law inroads on Texas at-will employment. The Sabine Pilot Doctrine is a narrow Texas common-law exception to the at-will employment doctrine, established by the Texas Supreme Court in Sabine Pilot Service, Inc. v. Hauck , 687 S.W.2d 733 (Tex. 1985). Under the doctrine, an employee may sue for wrongful discharge if the sole reason for termination was the employee's refusal to perform an illegal act that carries criminal penalties. Sabine Pilot is one of the few common-law exceptions to Texas at-will employment, a state otherwise highly protective of employer termination authority. The doctrine has been applied narrowly; courts have generally declined to expand it beyond criminal-act refusals. Authority Foundational Texas case: Sabine Pilot Service, Inc. v. Hauck , 687 S.W.2d 733 (Tex. 1985). Key subsequent cases: Texas Department of Human Services v. Hinds , 904 S.W.2d 629 (Tex. 1995) (sole-reason requirement); Winters v. Houston Chronicle Publ'g Co. , 795 S.W.2d 723 (Tex. 1990) (declining to extend); Austin v. HealthTrust, Inc. , 967 S.W.2d 400 (Tex. 1998) (declining to extend to retaliation for whistleblowing on non-criminal misconduct). Federal/state whistleblower statutes operating alongside Sabine Pilot: Sarbanes-Oxley Act §§ 806, 1107; Dodd-Frank Whistleblower; Tex. Gov't Code Ch. 554 (Texas Whistleblower Act for public employees only). The Sabine Pilot framework Sabine Pilot requires the plaintiff to prove: (1) employee was discharged from employment; (2) the sole reason for discharge was ; (3) employee's refusal to perform an act ; (4) that the employee in good faith believed ; (5) was illegal under criminal law . The "sole reason" requirement is particularly important, the discharge must have been solely for the refusal. If multiple reasons motivated the discharge, the claim typically fails. The "criminally illegal" requirement excludes refusal of acts that are merely civilly actionable, regulatory violations without criminal penalties, or ethical violations. The "criminally illegal" requirement The act refused must carry criminal penalties, not merely be civilly actionable or regulatory. Examples supporting Sabine Pilot: fraud with criminal exposure; tax evasion; perjury; environmental crimes; OSHA criminal violations. Acts that DO NOT support Sabine Pilot: civil torts without criminal exposure; ethical violations not amounting to crimes; policy violations; regulatory infractions without criminal penalty; conduct merely contrary to public policy. The narrow scope is intentional, Texas courts have repeatedly declined to expand the doctrine. The "sole reason" requirement The "sole reason" element distinguishes Sabine Pilot from some other states' broader public-policy exceptions. Texas Department of Human Services v. Hinds (Tex. 1995) confirmed the strict "sole reason" requirement. Plaintiffs must show that the refusal to perform the criminal act was the only reason for discharge, not merely a motivating factor. Mixed motives generally defeat the claim. This contrasts with Title VII's "motivating factor" framework and creates a substantially higher burden for Sabine Pilot plaintiffs. What Sabine Pilot does not cover Texas courts have repeatedly declined to extend Sabine Pilot beyond its narrow scope: (1) Winters , refusal to commit non-criminal misconduct does not support Sabine Pilot; (2) Austin v. HealthTrust , internal whistleblowing on non-criminal misconduct not protected; (3) retaliation for reporting (as opposed to refusing to commit) crimes, generally not protected under Sabine Pilot, though may be protected under specific statutory whistleblower provisions; (4) refusal of unethical or unprofessional conduct not amounting to crime, not protected. Statutory whistleblower protections While Sabine Pilot is narrow, several statutory whistleblower regimes provide broader protection: (1) Texas Whistleblower Act (Tex. Gov't Code Ch. 554), for public employees only; (2) Sarbanes-Oxley Act § 806 , protects employees of public companies from retaliation for reporting securities fraud, mail fraud, wire fraud; (3) Dodd-Frank Whistleblower , bounty and protection program for SEC whistleblowers; (4) OSHA whistleblower , multiple OSHA-administered statutes protect workplace-safety reporting; (5) various sector-specific protections . Plaintiffs typically plead Sabine Pilot alongside applicable statutory protections. Damages and remedies Sabine Pilot is a tort cause of action with traditional tort damages: (1) back pay ; (2) front pay or reinstatement ; (3) compensatory damages for emotional distress; (4) punitive damages (subject to Tex. Civ. Prac. & Rem. Code Ch. 41 caps); (5) attorney's fees under various theories. The damages structure can produce substantial recoveries in egregious cases. Practical context For Texas employees, Sabine Pilot provides narrow protection, specifically for refusing to commit crimes. Best practice: (1) document the refused act with specificity; (2) document the reasons given for any subsequent discharge; (3) preserve evidence of "sole reason"; (4) consult counsel before refusing, pretextual refusal that doesn't involve criminal conduct creates risk; (5) recognize that Sabine Pilot does not cover refusal of non-criminal acts; (6) consider statutory whistleblower frameworks alongside Sabine Pilot. For employers: (1) ensure termination decisions for Sabine Pilot-implicating situations are well-documented with multiple legitimate reasons; (2) train managers on Sabine Pilot's narrow scope; (3) maintain compliance programs minimizing exposure; (4) coordinate with statutory whistleblower compliance. Common pattern: plaintiff alleges Sabine Pilot but ultimately fails on "sole reason" because legitimate performance issues existed. Companion article: Before Firing an Employee Related Terms Wrongful Termination · At-Will Employment · Texas Commission on Human Rights Act · Workplace Discrimination · Severance Agreement SAFE (Simple Agreement for Future Equity) § An investment instrument developed by Y Combinator in 2013, providing rights to future equity in exchange for a current capital contribution. SAFEs convert to preferred stock upon a qualified equity financing, acquisition, or dissolution event, typically with a valuation cap, discount, or both. Distinguishable from convertible notes: SAFEs are not debt, do not accrue interest, and have no maturity date. Most-used early-stage investment instrument for U.S. startups. A SAFE, Simple Agreement for Future Equity, is an investment instrument developed by Y Combinator in 2013, providing rights to future equity in exchange for a current capital contribution. SAFEs convert to preferred stock upon a qualified equity financing, acquisition, or dissolution event, typically with a valuation cap, discount, or both. SAFEs have largely displaced convertible notes as the dominant early-stage investment instrument for U.S. startups, particularly at pre-seed and seed stages, because of their simpler structure and absence of debt features (no interest, no maturity date). Authority SAFE templates: published by Y Combinator (most-used post-money SAFE template, updated 2018-2019). Securities law treatment: SAFEs are securities subject to Securities Act of 1933 and SEC regulations; typically issued under Rule 506(b) or 506(c) of Regulation D. State law: governed by general contract law and corporate law of issuer's state of incorporation. Texas: governed by general Texas contract law and Tex. Bus. Orgs. Code corporate provisions. SAFE vs. convertible note Key distinctions between SAFE and convertible note: (1) SAFE is not debt , no maturity date, no interest accrual, no repayment obligation; (2) convertible note is debt , has maturity date (typically 18-24 months), accrues interest, must be repaid or converted at maturity; (3) SAFE balance sheet treatment , typically equity; (4) convertible note treatment , debt liability until conversion. For founders, SAFEs are typically more favorable: no maturity pressure, no interest accumulation, simpler legal structure. For investors, convertible notes provide more protection: maturity creates leverage, interest provides return on delay. Conversion mechanics SAFEs convert to preferred stock upon: (1) qualified equity financing , typically a "Series" round meeting minimum size threshold ($1M+ standard); (2) liquidity event , change of control or IPO; (3) dissolution , winding up of company. Conversion typically uses: (a) valuation cap , maximum conversion price (cap price); (b) discount , discount to the qualified financing price (typically 10-20%); (c) better-of , investor receives the more favorable of cap price or discount price. Some SAFEs include only one mechanism; sophisticated SAFEs include both. Pre-money vs. post-money SAFE The two principal SAFE templates: (1) pre-money SAFE , original 2013 template; valuation cap is pre-money valuation; SAFE holders' ownership dilutes when subsequent SAFEs are added; (2) post-money SAFE , Y Combinator's 2018 update; valuation cap is post-money (calculated after all outstanding SAFEs convert); SAFE holders' ownership is fixed and does not dilute from subsequent SAFEs. Post-money SAFE is now the dominant template, it gives investors more certainty about ownership but requires careful cap table management. Most SAFE-issuing startups should be aware which template they're using and the cap table implications. Standard SAFE terms Y Combinator's post-money SAFE has four standard variations: (1) cap, no discount , most common; conversion at lower of cap price or financing price; (2) discount, no cap , fixed discount to financing price (e.g., 20%); (3) cap and discount , investor receives more favorable of cap or discount; (4) MFN (most favored nation) , investor can elect terms of any subsequent SAFE issued. The four variations support different deal structures; cap-and-discount and cap-only are most common for typical seed deals. SAFE pitfalls Common SAFE issues: (1) cap table complexity , multiple SAFEs with different caps, discounts, and conversion mechanics create complexity at conversion; (2) founder dilution surprise , founders sometimes underestimate dilution from outstanding SAFEs at conversion; (3) valuation cap as ceiling , sophisticated investors may push to cap valuation at the cap, even if the round prices higher (typically prevented by careful drafting); (4) side letter complexity , additional terms (information rights, pro rata, MFN) added through side letters; (5) founder antidilution , typically not a feature of standard SAFEs but can be negotiated; (6) tax treatment , SAFE is generally not "stock" for tax purposes (no §83(b) election, no §1202 holding period start), important consideration for founders and investors. Tax considerations Tax treatment of SAFEs is uncertain in some respects: (1) investor tax basis , typically the investment amount becomes basis in converted shares; (2) §83(b) election , generally not applicable to SAFEs since they are not stock; investors should make §83(b) on conversion if subject to vesting; (3) §1202 QSBS holding period , typically begins at SAFE conversion, not SAFE issuance, limits early QSBS qualification for SAFE investors; (4) character on conversion , generally non-taxable like a contribution to capital. Sophisticated investors and founders may prefer convertible notes specifically for §1202 timing benefits. Practical context For Texas startups raising early-stage capital, SAFEs are the dominant instrument. Best practice: (1) use Y Combinator post-money SAFE template (most market-standard); (2) maintain comprehensive cap table tracking all outstanding SAFEs and their conversion mechanics; (3) understand cap table impact at conversion under various scenarios, model dilution carefully; (4) coordinate SAFE issuance with Reg D compliance (Form D, accredited investor verification); (5) limit SAFE complexity, multiple cap/discount combinations create management overhead; (6) at qualified financing round, work with counsel to manage SAFE conversion. For investors: (1) understand SAFE is not debt, no maturity, no interest, no repayment if no future round; (2) evaluate cap and discount in context of expected next-round valuation; (3) consider pro rata rights through side letter; (4) recognize tax holding-period implications for §1202 QSBS qualification; (5) document representations regarding accredited status. Common pitfall: founders raising too many SAFEs at increasing caps without modeling cumulative dilution, leading to substantial founder dilution surprise at Series A. Related Terms Convertible Note · Regulation D · Accredited Investor · Section 1202 · Section 83(b) Election Sale of Goods § The transfer of title to tangible movable property in exchange for consideration. Governed by UCC Article 2 (Tex. Bus. & Com. Code Ch. 2). UCC Article 2 supplements general Texas contract law with specific rules tailored to commercial sales. A "sale of goods" is the transfer of title to tangible movable property in exchange for consideration. Sales of goods are governed by Article 2 of the Uniform Commercial Code, codified in Texas at Tex. Bus. & Com. Code Chapter 2 . UCC Article 2 supplements general Texas contract law with specific rules tailored to commercial sales transactions. Authority Tex. Bus. & Com. Code Ch. 2 : § 2.105 ("goods" definition); § 2.106 ("contract" and "agreement"); § 2.201 (statute of frauds); § 2.204 (formation in general); § 2.207 (additional terms in acceptance); § 2.305 (open price term); § 2.314 (implied warranty of merchantability); § 2.315 (implied warranty of fitness for particular purpose); § 2.316 (exclusion of warranties); §§ 2.601–2.616 (breach, repudiation, excuse). Scope Article 2 governs transactions in goods , tangible movable things at the time of identification to the contract ( § 2.105 ). It does not govern services, real estate, or pure intangibles. Mixed transactions (services + goods) are governed by Article 2 if the predominant purpose is the sale of goods; otherwise by general contract law. The "predominant purpose" test is fact-intensive. Statute of frauds (§ 2.201) A contract for the sale of goods for $500 or more is unenforceable unless evidenced by a writing signed by the party to be charged (the "party against whom enforcement is sought"). Exceptions: (1) specially manufactured goods; (2) admission in pleadings or testimony; (3) goods received and accepted; (4) merchant confirmation rule (between merchants, a written confirmation binds the recipient unless objected to within 10 days). Battle of the forms (§ 2.207) Where buyer and seller exchange standard forms with conflicting terms, § 2.207 supplies a complex framework for determining whether a contract was formed and which terms govern. Texas adopted UCC § 2.207 substantially as drafted; common-law "mirror image" rule does not apply. Implied warranties Two implied warranties arise by operation of law in covered transactions: merchantability ( § 2.314 , in transactions by merchants) and fitness for particular purpose ( § 2.315 , where seller knows of buyer's particular purpose and buyer relies on seller's skill). Both can be disclaimed under § 2.316 with specific language and conspicuousness requirements. See Warranty . Risk of loss and remedies Article 2 also supplies detailed risk-of-loss rules ( §§ 2.509–2.510 ), seller's and buyer's remedies on breach ( §§ 2.703–2.717 ), and excuse doctrines ( §§ 2.613–2.616 ) including impracticability. Practical context Most commercial sales between businesses are Article 2 transactions, supply contracts, equipment purchases, inventory sales. Article 2 fills gaps in incomplete contracts (open price, open delivery terms, open payment terms) and supplies default warranties unless disclaimed. Sophisticated practice involves understanding which UCC defaults apply and whether contract drafting modifies them. Companion article: Contract Disputes in Texas Related Terms Warranty · Statute of Frauds · Force Majeure · Liquidated Damages Sanctions § Court-imposed penalties for litigation misconduct, including frivolous pleadings, discovery abuse, and violation of court orders. Texas authorizes sanctions under Tex. R. Civ. P. 13, Tex. R. Civ. P. 215 (discovery), and Tex. Civ. Prac. & Rem. Code Chapters 9 (frivolous claims) and 10 (sanctions for false pleadings). The constitutional due-process framework for sanctions is established by TransAmerican Natural Gas Corp. v. Powell, 811 S.W.2d 913 (Tex. 1991). Sanctions are court-imposed penalties for litigation misconduct, including frivolous pleadings, discovery abuse, and violations of court orders. Texas civil-practice sanctions operate under multiple overlapping authorities: Rule 13 (frivolous pleadings), Rule 215 (discovery sanctions), Tex. Civ. Prac. & Rem. Code Chapter 9 (frivolous claims), and Chapter 10 (false pleadings). The constitutional due-process framework, limiting the most severe sanctions to misconduct that justifies the penalty, is established by TransAmerican Natural Gas Corp. v. Powell , 811 S.W.2d 913 (Tex. 1991). Authority Texas sanctions framework: Tex. R. Civ. P. 13 (groundless or filed for improper purpose); Tex. R. Civ. P. 215 (discovery sanctions); Tex. R. Civ. P. 191.3 (signature on discovery responses); Tex. R. Civ. P. 91a (dismissal of baseless causes of action). Statutory framework: Tex. Civ. Prac. & Rem. Code Ch. 9 (frivolous claims and pleadings); Ch. 10 (sanctions for filing false pleadings). Constitutional limits: TransAmerican Natural Gas Corp. v. Powell , 811 S.W.2d 913 (Tex. 1991) (due-process framework for case-dispositive sanctions); Low v. Henry , 221 S.W.3d 609 (Tex. 2007) (proportionality requirement for monetary sanctions). Federal counterparts: Fed. R. Civ. P. 11 ; 28 U.S.C. § 1927 . Rule 13, groundless pleadings Rule 13 imposes sanctions on parties or attorneys who sign and file pleadings, motions, or other papers that are (1) groundless and brought in bad faith; (2) groundless and brought for the purpose of harassment; or (3) signed in violation of the rule's certification requirements. "Groundless" means having no basis in law or fact and not warranted by good-faith argument for the extension, modification, or reversal of existing law. The trial court must hold a hearing and make specific findings before imposing Rule 13 sanctions; the conclusory finding "groundless and frivolous" is insufficient. Rule 215, discovery sanctions Rule 215 authorizes sanctions for discovery abuse, ranging from minor monetary sanctions for failure to attend a deposition to case-dispositive sanctions for repeated, bad-faith failures to comply with discovery orders. Categories: (1) Rule 215.1 , sanctions on motion to compel; (2) Rule 215.2 , sanctions for failure to comply with discovery orders, including: prohibition of certain claims/defenses, deemed admissions, prohibited evidence, striking of pleadings, dismissal, default judgment, contempt. The most severe Rule 215 sanctions are subject to TransAmerican's due-process framework. The TransAmerican framework TransAmerican Natural Gas Corp. v. Powell , 811 S.W.2d 913 (Tex. 1991), establishes constitutional due-process limits on case-dispositive sanctions (dismissal, default judgment, striking pleadings). The framework requires: (1) a direct relationship between the offensive conduct and the sanction, the sanction should be aimed at the conduct that caused harm; (2) a sanction proportionate to the conduct, the sanction must not be excessive; (3) consideration of lesser sanctions before imposing case-dispositive penalties, the trial court must determine that lesser sanctions would not deter the misconduct or remedy its effects. Sanctions imposed without proper TransAmerican analysis are subject to reversal. Chapter 9 and Chapter 10 statutory sanctions Chapter 9 (Frivolous Claims) authorizes sanctions for parties or counsel who file lawsuits or pleadings that are frivolous, unreasonable, or without foundation. Sanctions can include monetary penalties, attorney's fees, and costs. Chapter 10 (Sanctions for Filing of Frivolous or Groundless Pleadings) is the principal statutory analog to Rule 13, with substantially similar standards. Chapter 10 imposes a 21-day "safe harbor" period, the offending party may withdraw or correct the pleading within 21 days of notice without sanction. Courts often analyze Chapter 9, Chapter 10, and Rule 13 motions together; standards substantially overlap. Proportionality, Low v. Henry Low v. Henry , 221 S.W.3d 609 (Tex. 2007), articulates a proportionality requirement for monetary sanctions: the amount must be proportionate to the offending conduct and necessary to deter the misconduct. Sanctions awards substantially exceeding actual harm, attorney's fees, or other quantifiable measures are subject to reversal as excessive. Trial courts should make specific findings supporting the amount of monetary sanctions imposed; conclusory awards risk reversal. Rule 91a, dismissal of baseless claims Rule 91a (added 2013) authorizes dismissal of causes of action that have no basis in law or fact, providing a mechanism for early dismissal of meritless claims similar to federal Rule 12(b)(6) but with bilateral attorney's-fee provisions. The losing party must pay attorney's fees (subsequently amended to make fees discretionary in some circumstances). Rule 91a is sometimes characterized as a sanctions tool but is technically a dismissal mechanism with fee-shifting consequences; the standards for dismissal are different from sanctions standards. Common sanctions categories Recurring sanctions categories in Texas commercial litigation: (1) discovery abuse , withholding documents, evasive responses, abusive deposition conduct; (2) spoliation , destruction of relevant evidence; (3) frivolous filings , claims without legal or factual basis; (4) harassment filings , pleadings filed for purpose of harassment or delay; (5) violation of court orders , protective orders, scheduling orders, gag orders; (6) perjurious testimony , when discovered during litigation; (7) improper communications with represented parties or jurors. Practical context For Texas commercial litigants, sanctions are both a defensive risk and an offensive tool. Defensively: (1) ensure pleadings have factual and legal basis at filing; (2) cooperate in discovery, including document preservation from inception; (3) respond to deficiency notices and objections promptly; (4) seek protective orders and clarification when faced with overbroad discovery; (5) be alert to safe-harbor protections under Chapter 10. Offensively: (1) document opposing-party misconduct contemporaneously; (2) raise concerns with opposing counsel before filing motions (creates procedural foundation and demonstrates good faith); (3) frame sanctions motions specifically, request specific remedies, with proportionality analysis; (4) for case-dispositive sanctions, satisfy TransAmerican's three-prong framework explicitly. Sanctions awards reversed on appeal are often reversed for failure of trial-court analytical rigor, careful procedural posture is essential. Related Terms Expert Witness Disclosure · Attorney's Fees Recovery · Summary Judgment · Mandamus Sandbagging § A buyer's practice of closing a transaction despite knowing of a breach of seller's representations or warranties, then bringing an indemnification claim post-closing for that known breach. Whether sandbagging is permissible depends on the agreement's express provisions and the governing state's default rule. "Sandbagging" in M&A refers to a buyer's practice of closing a transaction despite knowing of a breach of seller's representations or warranties, then bringing an indemnification claim post-closing for that known breach. Whether sandbagging is permissible depends on the agreement's express provisions and, where the agreement is silent, the governing state's default rule. Authority No Texas statutory authority, sandbagging issues turn on contract interpretation and Texas common law on representations, warranties, and reliance. Pro-sandbagging clauses (buyer-favorable) A pro-sandbagging clause provides that the buyer's indemnification rights are not affected or limited by any pre-closing knowledge of the breach. Typical drafting: "Buyer's right to indemnification shall not be impacted or limited by any knowledge that Buyer may have acquired… whether before or after the closing date." Anti-sandbagging clauses (seller-favorable) An anti-sandbagging clause prohibits indemnification for breaches the buyer knew (or should have known) about before closing. Typical drafting: "Seller shall not be liable to Buyer for any breach if Buyer had knowledge of such breach before the closing date." Texas default rule (where the agreement is silent) Texas has not produced definitive Texas Supreme Court authority establishing the default rule. Texas courts have generally applied contract-based reasoning, treating reps and warranties as bargained-for promises that the buyer is entitled to rely on regardless of pre-closing knowledge, broadly aligning with the "Modern Rule" (followed by Delaware and New York). However, the absence of a controlling Texas Supreme Court decision means Texas-governed agreements should expressly address the issue rather than rely on the default rule. Market practice ABA Deal Points Studies report approximately 42% of M&A agreements contain pro-sandbagging clauses, 6% contain anti-sandbagging clauses, and 51% are silent. The "silent" rate is artificially elevated, most "silent" agreements reflect parties who could not agree, leaving the issue for the choice-of-law default rule. Practical context For buyers, the safest position is an express pro-sandbagging clause combined with a Delaware or New York choice of law (the most clearly Modern Rule jurisdictions). For Texas-governed deals, parties should expressly address sandbagging rather than rely on uncertain Texas default-rule authority. Companion article: Selling Your Business in Texas Related Terms Representations and Warranties · Disclosure Schedule · Indemnification (M&A) · Due Diligence Schedule K-1 § The IRS information schedule used by partnerships, LLCs taxed as partnerships, and S-corporations to report each owner's distributive share of the entity's income, deductions, gains, losses, and credits. Generated annually as part of Forms 1065 and 1120-S; furnished to each owner for use in preparing individual returns. Schedule K-1 is the IRS information schedule that pass-through entities use to report each owner's distributive share of the entity's income, deductions, gains, losses, and credits. Three principal versions exist: Schedule K-1 (Form 1065) for partnerships and LLCs taxed as partnerships; Schedule K-1 (Form 1120-S) for S-corporations; and Schedule K-1 (Form 1041) for trusts and estates. The K-1 is the link between the entity-level return and the owner's individual return. Authority Partnership reporting: 26 U.S.C. § 6031 (partnership return required); IRS Forms 1065 and Schedule K-1 (Form 1065). S-corporation reporting: 26 U.S.C. § 6037 ; Forms 1120-S and Schedule K-1 (Form 1120-S). Trust/estate K-1s: 26 U.S.C. § 6012 ; Form 1041 and Schedule K-1 (Form 1041). Penalties for failure to furnish: 26 U.S.C. § 6722 . What the K-1 reports The K-1 reports the owner's allocated share of: (1) ordinary business income or loss; (2) net rental real estate income or loss; (3) other rental income or loss; (4) interest, dividends, and other portfolio income; (5) net short-term and long-term capital gains; (6) Section 1231 gains or losses; (7) other income or loss items; (8) Section 179 deductions and other deductions; (9) self-employment income (partnership K-1s only); (10) credits; (11) foreign transactions; (12) alternative minimum tax adjustments. Each line item flows to a specific form or schedule on the owner's individual return. Filing deadlines and timing Partnership and S-corp returns (Forms 1065 and 1120-S) are due March 15 for calendar-year entities, with K-1s required to be furnished to owners by that date. A six-month extension to September 15 is available with Form 7004. The March 15 deadline often does not provide individuals with sufficient time to incorporate K-1 information before the April 15 individual deadline, leading many pass-through owners to extend their individual returns. Allocation methodologies For partnerships and LLCs taxed as partnerships, allocations may follow either the partnership agreement's allocations (if the allocations have substantial economic effect under the § 704(b) regulations) or the partners' interests in the partnership. S-corporations are required to allocate strictly pro rata based on stock ownership, special allocations are not permitted. Targeted allocation provisions, waterfall allocations, and capital-account-based allocations are common in sophisticated partnership and LLC agreements. Common K-1 problems Frequent issues include: (1) late delivery to owners, forcing extension of individual returns; (2) errors that require corrected K-1s and amended individual returns; (3) state K-1 reporting for multistate entities, generating multiple K-1s per owner per year; (4) phantom income from allocated income exceeding distributions; (5) basis tracking, the owner's basis in the entity affects the deductibility of losses and the taxability of distributions, but the K-1 does not automatically track basis; the owner must maintain a separate basis worksheet. Practical context For Texas pass-through owners, the K-1 is the most important annual tax document received. Best practice: (1) extend the individual return by April 15 if K-1 may not arrive timely; (2) maintain a basis worksheet across years to track ability to deduct losses; (3) coordinate with the entity to ensure K-1 accuracy before relying on it for the individual return; (4) flag unusual line items (foreign transactions, AMT adjustments, self-charged-interest items) for tax-preparer review; (5) keep prior-year K-1s, basis adjustments and suspended losses can affect returns years later. Companion article: Business Divorces in Texas Related Terms Pass-Through Entity · S-Corporation Election · Tax Distribution Provision · Estimated Tax Payments · Phantom Income Section 1031 Exchange § A tax-deferred exchange of real property held for productive use in trade or business or investment under Internal Revenue Code Section 1031. Defers recognition of capital gain by exchanging into like-kind property. Post-2017 Tax Cuts and Jobs Act, available only for real property (personal property exchanges eliminated). Strict timing requirements: 45 days to identify replacement property, 180 days to close. Typically structured through Qualified Intermediary (QI) holding sale proceeds. A Section 1031 Exchange is a tax-deferred exchange of real property held for productive use in trade or business or investment under Internal Revenue Code Section 1031. Section 1031 defers recognition of capital gain by exchanging into "like-kind" property, allowing real estate investors to redeploy capital across properties without triggering current tax. The 2017 Tax Cuts and Jobs Act eliminated 1031 treatment for personal property, limiting the provision to real estate. Section 1031 exchanges are foundational to U.S. real estate investment economics. Authority Federal statute: 26 U.S.C. § 1031 (Exchange of real property held for productive use or investment). Treasury regulations: 26 C.F.R. § 1.1031 et seq. Tax Cuts and Jobs Act of 2017: limited § 1031 to real property. Qualified intermediary safe harbor: 26 C.F.R. § 1.1031(k)-1 . Foundational case: Starker v. United States , 602 F.2d 1341 (9th Cir. 1979) (deferred exchanges). Like-kind requirement "Like-kind" for real property is broadly construed: (1) any real property held for productive use or investment qualifies for exchange with any other real property held for productive use or investment; (2) commercial vs. residential rental , both qualify; (3) land vs. improved property , both qualify; (4) fee vs. leasehold (30+ years) , both qualify. Excluded: primary residence; property held for sale (inventory); foreign real property (no exchange with US real property). The broad like-kind interpretation gives substantial flexibility for real estate redeployment. Strict timing requirements Section 1031 imposes strict timing: (1) 45-day identification period , taxpayer must identify replacement property in writing within 45 days of relinquished property closing; (2) 180-day exchange period , taxpayer must complete acquisition of replacement property within 180 days of relinquished property closing OR by tax return due date for year of relinquishment, whichever is earlier. The 45/180 windows are absolute, extensions only for natural disasters or specific Treasury exceptions. Failure to meet either deadline disqualifies the exchange entirely. Three identification rules Section 1031 permits identification under three alternative rules: (1) Three-Property Rule , identify up to three replacement properties regardless of value; (2) 200% Rule , identify any number of properties with total fair market value not exceeding 200% of relinquished property; (3) 95% Rule , identify any number of properties of any value, but must acquire 95% of identified value. Most taxpayers use Three-Property Rule; sophisticated taxpayers identify under 200% to maintain optionality. Qualified intermediary Direct exchanges are operationally difficult; most exchanges use Qualified Intermediary (QI) safe harbor: (1) QI holds sale proceeds from relinquished property; (2) taxpayer never receives proceeds , direct receipt would trigger taxable boot; (3) QI uses proceeds to acquire replacement property; (4) QI transfers replacement to taxpayer. QI must satisfy independence requirements (cannot be related party, employee, agent during 2-year period). QI selection is critical, QI failure (insolvency, fraud) creates substantial loss exposure. Boot and partial exchanges "Boot", non-like-kind property (cash, debt relief, other property), triggers gain recognition: (1) cash boot , gain recognized to extent of cash received; (2) debt boot , net debt relief is boot; (3) property boot , non-like-kind property received. To fully defer: (a) replacement property value ≥ relinquished property value; (b) replacement property debt ≥ relinquished property debt; (c) all proceeds reinvested. "Partial" exchanges with some boot defer most gain but recognize some, useful when full reinvestment is impractical. Common structures Recurring exchange structures: (1) delayed exchange , sale first, replacement after; standard QI structure; (2) simultaneous exchange , closing on same day; rare in practice; (3) reverse exchange , replacement acquired before relinquished property sale; uses Exchange Accommodation Titleholder (EAT); (4) build-to-suit / improvement exchange , improvements made to replacement property during exchange period; complex; (5) Delaware Statutory Trust (DST) , fractional ownership in institutional property; passive investment alternative. Practical context For Texas real estate investors, Section 1031 is foundational tax planning. Best practice: (1) plan exchange before closing relinquished property, coordinating QI engagement and replacement property identification; (2) engage experienced QI, independent, well-capitalized, established firm; (3) calendar 45/180 deadlines absolutely; (4) identify multiple replacement properties to maintain optionality; (5) ensure replacement property value and debt at least match relinquished, for full deferral; (6) coordinate with cost segregation and depreciation strategy on replacement property; (7) document exchange compliance carefully. For sellers/buyers in transactions with 1031 party: (1) accommodate exchange structure (typically standard); (2) coordinate timing, may affect closing schedule; (3) use exchange addenda in purchase agreements. Common pitfall: missed 45-day identification deadline, single most common reason for failed exchanges. Calendar discipline is essential. Related Terms Commercial Real Estate Purchase Agreement · Deed · Title Insurance · Earnest Money · Section 1202 Section 1202 (QSBS Exclusion) § 2025 Internal Revenue Code Section 1202 provides an exclusion of up to 100% of capital gains on the sale of qualified small business stock (QSBS) held for at least 5 years. Maximum exclusion: greater of $10 million or 10x basis. Requirements: (i) C corporation issuer with assets ≤$50M (since 2026 amendments) at issuance, (ii) active business in qualified industry, (iii) original issuance, (iv) 5-year holding period. Among the most powerful tax provisions for U.S. startups and early-stage investors. Internal Revenue Code Section 1202 provides an exclusion of up to 100% of capital gains on the sale of qualified small business stock (QSBS) held for at least 5 years. The exclusion is among the most powerful tax provisions for U.S. startups and early-stage investors, properly structured QSBS investments can generate millions of dollars of tax-free gain on exit. Section 1202 has been amended multiple times to expand its scope, most recently with the One Big Beautiful Bill Act (OBBBA) reforms expanding asset thresholds and gain exclusion limits. Authority Federal statute: 26 U.S.C. § 1202 (Partial exclusion for gain from certain small business stock). Key sub-provisions: § 1202(a) (exclusion percentages); § 1202(b) ($10M / 10x basis cap); § 1202(c) (qualified small business stock definition); § 1202(d) (qualified small business, assets test); § 1202(e) (active business requirement). Treasury regulations: 26 C.F.R. § 1.1202 et seq. State conformity varies, some states fully conform (no state tax on QSBS gain); some partially; some don't conform (state tax applies regardless of federal exclusion). California does not conform; Texas has no state income tax (so QSBS gain is federal-only consideration for Texas residents). The exclusion percentages Section 1202 exclusion percentage depends on stock acquisition date: (1) before Feb. 18, 2009 , 50% exclusion; (2) Feb. 18, 2009 - Sept. 27, 2010 , 75% exclusion; (3) after Sept. 27, 2010 , 100% exclusion (the standard for current investments). The 100% exclusion makes post-2010 QSBS particularly valuable, qualifying gain is entirely excluded from federal income tax (with parallel exclusion from federal Net Investment Income Tax and AMT for 100% category). Pre-2010 stock has reduced exclusions and partial AMT preference treatment. The dollar cap, $10M or 10x basis The maximum gain excludable per issuer per taxpayer is the greater of: (1) $10 million ; (2) 10x adjusted basis . Example: investor purchases QSBS for $200K; can exclude up to $10M gain (the greater amount); for $500K basis, can exclude up to $10M (still); for $2M basis, can exclude up to $20M (10x); for $5M basis, can exclude up to $50M (10x). Higher-basis investors benefit substantially from the 10x multiplier. Multiple QSBS investments in different issuers each have their own $10M/10x cap, the cap is per-issuer. Qualified small business, asset test Section 1202(d) requires the issuer to be a "qualified small business", historically defined as C corporation with aggregate gross assets of $50 million or less at all times during qualifying period (immediately before and after stock issuance). The 2025 OBBBA reforms increased the asset threshold to $75 million for stock issued after the effective date, expanding QSBS eligibility for slightly larger companies. The asset test is at issuance, not at sale; companies that grow substantially after QSBS issuance retain QSBS qualification. Active business requirement The issuer must conduct a "qualified trade or business", generally any business EXCEPT: (1) professional services , health, law, engineering, accounting, actuarial, performing arts, consulting, athletics, financial services, brokerage; (2) banking, insurance, financing, leasing, investing ; (3) farming ; (4) extraction of natural resources , oil, gas, mining; (5) hotels, restaurants, similar businesses . Most technology companies, manufacturers, retailers, and many service businesses qualify. The exclusions reflect Congressional judgment about which industries deserve QSBS preferential treatment. Original issuance requirement QSBS must be acquired by the taxpayer at original issuance, not from a prior holder. Acquisition methods: (1) direct from issuer , most common; (2) tax-free exchanges , typically from another QSBS issuer in §351 or §368 transactions; (3) gift , recipient inherits original issuance status; (4) death , heir inherits original issuance status. Secondary purchases of QSBS (from a prior holder) do NOT qualify, buyer's gain is not QSBS-eligible. This requirement makes QSBS planning particularly important at financing rounds. 5-year holding period QSBS must be held for at least 5 years before sale to qualify for the exclusion. Sales before 5 years: (1) regular capital gain , no QSBS exclusion; (2) §1045 rollover , sale plus reinvestment in new QSBS within 60 days defers gain and tacks holding period. The 5-year requirement aligns QSBS with long-term investment horizons. Holding period typically begins: SAFE, at conversion to stock; convertible note, at investment (debt-to-stock exchange tacks holding period); preferred stock, at issuance. Section 1045 rollover Section 1045 permits gain deferral on QSBS sales held more than 6 months but less than 5 years if proceeds are reinvested in new QSBS within 60 days. Mechanics: (1) sale of QSBS with gain; (2) reinvestment within 60 days into different QSBS issuer; (3) gain deferred rather than recognized; (4) basis carried over to new QSBS; (5) holding period tacks from original investment. § 1045 is valuable for managing QSBS portfolios and resetting QSBS positions; sophisticated QSBS investors use it actively. Stack structures and family planning Sophisticated QSBS planning multiplies $10M cap across multiple taxpayers: (1) spousal stack , joint filers have one $10M cap, but spouse can have separate $10M cap if originally issued to spouse; (2) trust stack , non-grantor trusts can each have separate $10M cap; family planning with non-grantor trusts can multiply the exclusion; (3) charitable planning , donations of QSBS to charity provide deductions and avoid recognition. Stack structures require careful tax planning but can substantially expand QSBS benefit. Practical context For Texas startups and investors, QSBS planning is high-value. Best practice for issuers: (1) maintain C corporation status from inception (LLC must convert to C corp; consider timing carefully, conversion before substantial value creation preserves QSBS); (2) document QSBS qualification at each issuance, corporate records confirming asset levels, active business, original issuance; (3) coordinate equity issuances to maximize QSBS-qualifying timing; (4) avoid disqualifying redemptions in 4-year window before/after issuance; (5) provide investors with QSBS qualification analysis at investment. For investors: (1) verify QSBS qualification at investment, request issuer representations and analysis; (2) document basis carefully, tax records, subscription documents; (3) plan 5-year holding period from investment; (4) consider §1045 rollover for shorter-hold positions; (5) consider stack structures for high-value positions; (6) maintain QSBS records through holding period. For founders: (1) understand that LLC-to-C-corp conversion timing affects QSBS, generally must convert before substantial value creation; (2) preserve QSBS through subsequent rounds, most rounds maintain QSBS; (3) coordinate exit timing with 5-year requirement. Common pitfall: companies operating as LLC for years before C-corp conversion lose QSBS for value creation during LLC period, early planning preserves substantial future tax savings. Companion article: Selling Your Business Related Terms Section 83(b) Election · C Corporation Tax Treatment · Convertible Note · SAFE · Preferred Stock Section 363 Sale § A sale of property of the bankruptcy estate under 11 U.S.C. § 363, typically conducted under court supervision in Chapter 11 cases. Property is sold "free and clear" of liens, claims, and interests under § 363(f), with liens attaching to sale proceeds. Common in distressed M&A; provides certainty of clean title and quick sale process. Often conducted through stalking-horse bidder establishing minimum bid, followed by auction process. Standard mechanism for selling distressed businesses without full Chapter 11 plan confirmation. A Section 363 Sale is a sale of property of the bankruptcy estate under 11 U.S.C. § 363, typically conducted under court supervision in Chapter 11 cases. Property is sold "free and clear" of liens, claims, and interests under § 363(f), with liens attaching to sale proceeds. Section 363 sales are foundational to distressed M&A, they provide certainty of clean title and a quick sale process compared to plan confirmation. Most large Chapter 11 cases use 363 sales to monetize assets, with the resulting proceeds distributed through a subsequent plan or structured dismissal. Authority Federal statute: 11 U.S.C. § 363 . Free-and-clear authority: § 363(f) . Stay pending appeal: § 363(m) . Foundational cases: In re Lionel Corp. , 722 F.2d 1063 (2d Cir. 1983) (sound business reasons standard); In re Chrysler LLC , 405 B.R. 84 (Bankr. S.D.N.Y. 2009), aff'd 576 F.3d 108 (2d Cir. 2009) (free-and-clear sale of major operations); Czyzewski v. Jevic Holding Corp. , 580 U.S. 451 (2017) (limits on priority skipping). Free-and-clear authority, § 363(f) Section 363(f) permits sale free and clear of liens and interests if any of: (1) applicable nonbankruptcy law permits , sale free of interest; (2) consent of interest holder; (3) sale price exceeds aggregate value of all interests in property; (4) interest is in bona fide dispute ; (5) interest holder could be compelled to accept money satisfaction in legal or equitable proceeding. Most 363 sales rely on consent (alternative 2) or sale-price-exceeds-interests (alternative 3). Free-and-clear status is critical, buyers receive title without successor liability concerns. Stalking-horse process Standard 363 sale uses stalking-horse process: (1) stalking-horse agreement , initial bidder commits to purchase at specified price subject to higher bids; provides minimum floor; (2) bid procedures motion , court approval of auction process, bidding requirements, qualified bidder criteria, break-up fee, expense reimbursement; (3) marketing period , typically 30-60 days; (4) qualified bid deadline ; (5) auction , competing qualified bidders; (6) sale hearing , court approval of winning bid; (7) closing . Stalking horse typically receives break-up fee (1-3% of purchase price) and expense reimbursement if outbid. "Sound business reasons" standard Section 363 sales of substantially all assets are scrutinized under "sound business reasons" standard from In re Lionel (2d Cir. 1983). Factors include: (1) proportionate value of asset to estate ; (2) amount of elapsed time since filing ; (3) likelihood that plan of reorganization will be proposed and confirmed in near future ; (4) effect on future plan ; (5) amount of proceeds to be obtained from sale compared to appraised value or book value; (6) good faith of proposed sale ; (7) adequacy of process . Courts apply Lionel factors flexibly based on case circumstances. Section 363(m), sale finality Section 363(m) provides substantial finality to 363 sales: a reversal or modification on appeal of an authorization to sell does not affect the sale's validity to a good faith purchaser. This means the buyer receives substantial certainty, even if the sale order is later challenged, the buyer's title is typically protected. Sophisticated buyers insist on § 363(m) findings and "good faith" findings to maximize finality. Stay pending appeal is technically possible but rarely granted. Sub rosa plan concerns 363 sales of substantially all assets can constitute a "sub rosa plan", circumventing plan confirmation requirements. Czyzewski v. Jevic (2017) restricted structured dismissals that skip priority requirements. Courts scrutinize 363 sales that: (1) effectively distribute proceeds in violation of priority scheme; (2) bind creditors without plan confirmation procedures; (3) restructure debts outside plan framework. Modern practice typically uses 363 sale + subsequent plan to confirm distribution scheme, addressing sub rosa concerns. Successor liability Section 363 sales free and clear of "claims" provide significant protection from successor liability, including products liability, environmental, employment, and tort claims. In re Chrysler LLC (2009) confirmed broad free-and-clear treatment. Some claims (particularly environmental) may receive narrower treatment. Buyers in 363 sales typically negotiate broad free-and-clear language and specific findings on successor liability protection. Limitations: future claims (post-sale conduct), federal regulatory enforcement, certain employment obligations. Practical context For Texas distressed sellers and buyers, 363 sales offer significant advantages over out-of-court alternatives. Best practice for sellers: (1) consider pre-petition 363 strategy with stalking-horse bidder; (2) coordinate sale with DIP financing and milestones; (3) develop comprehensive marketing strategy; (4) negotiate stalking-horse protections (break-up fee, expense reimbursement). For buyers: (1) understand free-and-clear protections vs. limitations; (2) negotiate stalking-horse position with substantial bid protections; (3) conduct accelerated diligence, 30-60 day timeline typical; (4) coordinate with regulatory approvals if needed; (5) plan integration despite compressed timeline. For creditors: (1) review sale process for adequacy; (2) participate in objections to inadequate process; (3) preserve rights regarding distribution of proceeds. Common pitfall: rushed 363 sales without proper marketing or process, courts may reject sales lacking adequate market check. Companion article: Selling Your Business Related Terms Chapter 11 · Debtor-in-Possession · Plan of Reorganization · Asset Purchase · Automatic Stay Section 83(b) Election § An election to recognize income on the receipt of restricted property (typically founder or employee equity subject to vesting) at the time of grant rather than at vesting. Made by filing a written election with the IRS within 30 days of receipt. The election fixes the taxable amount at the grant-date value and starts the capital gains holding period. A Section 83(b) election is a federal tax election under Section 83(b) of the Internal Revenue Code allowing a recipient of restricted property, typically founder stock or employee equity subject to vesting, to recognize income at the time of grant rather than waiting until the property vests. The election fixes the taxable amount at the grant-date fair market value, starts the capital gains holding period, and converts what would otherwise be ordinary income at vesting into capital gain on later sale. The election must be filed with the IRS within 30 days of receipt, a deadline that has no extensions. Authority Statute: 26 U.S.C. § 83 (property transferred in connection with performance of services); § 83(b) (election to include in gross income in year of transfer). Implementing regulations: 26 C.F.R. § 1.83-2 (election under section 83(b)). Filing requirements: Rev. Proc. 2012-29 (sample election form). 30-day deadline: § 83(b)(2) . Why the election matters Without an 83(b) election, the recipient of restricted property recognizes ordinary income on each vesting date equal to the property's fair market value at vesting (less any amount paid). For founders whose stock is subject to a 4-year vesting schedule, this means recognizing ordinary income, at the highest rate, on each vesting tranche, calculated against the (presumably) growing value of the company. With an 83(b) election, the entire grant-date value is recognized once at grant, when the value is typically minimal, and all future appreciation is taxed as capital gain on sale. The 30-day deadline The election must be filed with the IRS within 30 days of the property transfer (the date of stock grant or unvested equity issuance). The deadline is strict, there is no extension, no relief for late filing, and no equitable doctrine that excuses missing it. The election is filed by mailing a written statement (Rev. Proc. 2012-29 provides a sample) to the IRS office where the recipient files their tax return, with copy retained for the recipient's tax return for the year of transfer. As of 2023, electronic filing of 83(b) elections is also accepted. Required election content The 83(b) election must include: (1) name, address, and taxpayer identification number of the taxpayer; (2) description of the property (e.g., 1,000,000 shares of Common Stock); (3) date of transfer and tax year for which the election applies; (4) nature of restrictions on the property; (5) fair market value at transfer (without regard to lapse restrictions); (6) amount paid for the property; (7) amount included in gross income; and (8) statement that copies have been furnished to the entity. Risk of forfeiture If the recipient pays tax on the grant-date value via 83(b) election but later forfeits the unvested shares (e.g., by leaving the company before vesting), no deduction or refund is available for the previously-paid tax. This is the principal risk of the election. For founders highly likely to remain through vesting and where grant-date value is low (often nominal), the risk is small relative to the upside. For employees with material grant-date value or uncertain commitment, the analysis is more nuanced. When the election is most valuable 83(b) elections are essentially mandatory for founders receiving stock in a newly-formed C-corporation, where the per-share value is typically nominal ($0.0001 or similar) and the entire grant value is well below any tax threshold. The election preserves capital-gains treatment on the entire equity stake, frequently worth millions in tax savings on a successful exit. For employees receiving stock at fair market value, the election analysis depends on growth expectations, vesting risk, and the recipient's individual tax situation. Practical context The 83(b) election is one of the small handful of legal-administrative steps where the cost of getting it wrong is permanent and large. Texas founders forming a C-corporation with vesting on founder stock should: (1) calendar the 30-day deadline at formation; (2) prepare the election concurrently with the stock grant documents; (3) mail certified-with-return-receipt and retain proof of timely mailing; (4) keep a copy in the company's books and records and the founder's tax records. Missed elections cannot be remediated and are one of the most common avoidable tax errors in startup formation. Related Terms Section 1202 / Qualified Small Business Stock · Stock Purchase · C-Corporation Tax Treatment · Shareholder · Capital Contribution Security Interest § A contingent property right held by a creditor in personal property of a debtor that secures payment or performance of an obligation. Foundation of secured commercial lending, equipment financing, working-capital lines, asset-based lending. Governed by UCC Article 9. A security interest is a contingent property right held by a creditor (the "secured party") in personal property of a debtor (the "collateral") that secures payment or performance of an obligation. If the debtor defaults, the secured party may, subject to UCC procedural requirements, take possession of and dispose of the collateral to satisfy the obligation. Security interests in personal property are governed by Article 9 of the Uniform Commercial Code, codified in Texas at Tex. Bus. & Com. Code Chapter 9 . Authority Tex. Bus. & Com. Code Ch. 9 (Texas adoption of UCC Article 9): § 9.102 (definitions); § 9.109 (scope); § 9.201 (general effectiveness of security agreement); § 9.203 (attachment); § 9.308 (perfection). Federal preemption: certain assets (aircraft, ship mortgages, federal IP rights) governed by federal law. Distinguished from real-property liens UCC Article 9 does not govern security interests in real property, those are governed by Texas mortgage law and real-estate-lien statutes. Article 9 covers all kinds of personal property: tangible (goods, inventory, equipment, fixtures) and intangible (accounts receivable, instruments, chattel paper, deposit accounts, investment property, general intangibles). Three lifecycle stages Attachment ( § 9.203 ): the security interest becomes enforceable against the debtor when (1) value has been given by the secured party; (2) the debtor has rights in the collateral; and (3) the debtor has authenticated a security agreement describing the collateral, or the secured party has possession or control of the collateral. Perfection ( § 9.308 ): the security interest becomes enforceable against third parties, typically by filing a UCC-1 financing statement with the Texas Secretary of State, but also by possession (for tangible collateral) or control (for deposit accounts, investment property, electronic chattel paper). See Perfection . Priority and enforcement ( §§ 9.317–9.339, 9.601–9.628 ): the secured party's rights against competing creditors are determined by the UCC priority rules (generally first-to-file-or-perfect wins), and on default the secured party may take possession and dispose of the collateral under the procedural requirements of Part 6. Purchase money security interest (PMSI) A PMSI is a special category of security interest taken to secure the purchase price of the specific collateral (or to enable acquisition of the collateral). § 9.103 . PMSIs receive priority over previously-perfected general security interests in the same collateral, subject to specific timing and notice requirements. § 9.324 . Practical context Security interests are foundational to commercial lending, equipment financing, working-capital lines secured by accounts receivable and inventory, asset-based lending. Inadequate documentation or perfection failures convert secured creditors into unsecured creditors in bankruptcy, with severe consequences for recovery. Sophisticated practice involves careful collateral description, timely UCC-1 filing, monitoring of debtor name changes and asset transfers, and continuation filings before the five-year lapse. Related Terms Financing Statement · Perfection · Collateral · Promissory Note · Guaranty Agreement Self-Insured Retention (SIR) § An amount the insured must pay before insurance coverage applies, distinct from a deductible in operation. With a deductible, the insurer typically defends from dollar one and is reimbursed; with an SIR, the insured retains responsibility for defense and indemnity within the SIR amount, with insurance attaching only above the SIR. SIRs are common in higher-risk industries, large commercial accounts, and as a cost-management tool. Triggers important questions about defense provider, coordination with insurance, and Stowers obligations. A Self-Insured Retention (SIR) is an amount the insured must pay before insurance coverage applies. SIRs differ operationally from deductibles in important ways: with a traditional deductible, the insurer typically provides defense from dollar one and is reimbursed by the insured; with an SIR, the insured retains responsibility for defense and indemnity within the SIR amount, with insurance attaching only after the SIR is exhausted. SIRs are common in higher-risk industries (energy, construction, healthcare), large commercial accounts, and as a cost-management tool for organizations with stable claim histories. Authority SIRs are creatures of contract, the policy form defines the SIR mechanics. No standard SIR form across the industry. Texas case law on SIR-specific issues: American Centennial Ins. Co. v. Canal Ins. Co. , 843 S.W.2d 480 (Tex. 1992) (excess insurer Stowers rights); various Texas appellate decisions on SIR exhaustion and bankruptcy. Coordination with Stowers doctrine: cases requiring the SIR-funding insured to evaluate settlement offers as if the insured were the carrier. Bankruptcy code interaction: 11 U.S.C. § 542 (turnover) and case law on insured obligation to fund SIR in bankruptcy. SIR vs. deductible, the operational distinction The principal operational differences: (1) defense provider , under SIR, insured typically defends within the SIR (or hires its own counsel); under deductible, insurer typically defends; (2) cash flow , under SIR, insured pays defense and indemnity dollars directly; under deductible, insurer pays and bills insured; (3) limits erosion , SIR amounts typically don't reduce the policy aggregate limit; deductibles often do; (4) insurer involvement , SIR-period claims are managed by the insured (with reporting to insurer); deductible-period claims are insurer-managed; (5) insolvency impact , if the insured is insolvent, SIR claims can become an issue (insurer not obligated to fund SIR for insolvent insured). The choice between SIR and deductible affects operations and economics. Common SIR contexts Where SIRs are typically used: (1) energy and oil/gas , large self-insured retentions ($1M+) common; (2) construction , SIRs on owner-controlled and contractor-controlled programs; (3) healthcare , medical professional liability with SIRs above $250K; (4) cyber , increasingly common; SIRs of $25K-$500K typical; (5) D&O , Side B/C usually has SIR (often called retention); Side A typically does not; (6) professional liability , large law firm and consulting practices often use SIRs; (7) large commercial accounts , Fortune 1000-class businesses use SIRs across multiple lines; (8) captive insurance , SIRs coordinate with captive insurance arrangements. Defense within the SIR Within the SIR amount, the insured typically defends with its own counsel (or sometimes through a TPA, third-party administrator). Common arrangements: (1) insured-counsel defense , insured retains its own counsel; (2) panel-counsel defense , insured uses approved panel counsel even within SIR; (3) TPA-managed defense , third-party administrator handles claims; (4) shared services , insured's risk management coordinates with insurer's claim handling. Quality of within-SIR defense affects post-SIR coverage; sloppy or under-funded defense within SIR can prejudice the insurer's position and expose the insured to coverage challenges. Stowers obligations within SIR SIR-funding insureds may have Stowers-like obligations to evaluate settlement offers within SIR as if the insured were the carrier. Excess insurers (responding above the SIR) can pursue Stowers-like claims against the insured for negligent failure to settle within SIR limits when reasonable demand was made. The doctrine creates pressure on insureds to evaluate settlement offers carefully even when the immediate cost is borne by the insured. Best practice: maintain disciplined claim evaluation processes within SIR; document settlement decisions carefully; coordinate with excess insurer on material settlement decisions. Reporting and coordination SIR policies typically require the insured to report claims and circumstances even during the SIR period: (1) initial notice , typically required upon awareness; (2) periodic updates , for matters likely to exceed SIR; (3) pre-settlement notice , before material settlements; (4) defense reports , for matters approaching SIR exhaustion. Failure to report can void coverage. Sophisticated insureds maintain reporting protocols ensuring compliance with policy notice provisions even for matters within SIR. SIR exhaustion SIRs are typically exhausted by amounts paid by the insured for indemnity, defense, or both (varies by policy). Important details: (1) defense costs within SIR , most SIRs include defense; some apply only to indemnity; (2) multiple claims , SIRs may be per-claim (each claim has its own SIR) or aggregate (SIR shared across all claims); (3) exhaustion proof , insureds must demonstrate SIR exhaustion before coverage attaches; (4) coordination with carrier , exhaustion notice typically required. Disputes about SIR exhaustion are common; precise policy language and contemporaneous documentation prevent most issues. Bankruptcy and insolvency considerations SIRs raise specific bankruptcy issues: (1) insurer obligation to fund SIR , insurers generally are not obligated to fund the SIR if the insured cannot pay (some policies have "drop-down" but most do not); (2> SIR as estate asset , funded SIR amounts may be estate assets in bankruptcy; (3) claim treatment , SIR-period claims may be treated as general unsecured claims in bankruptcy; (4) D&O Side B/C SIR , particularly important; if the insured cannot fund Side B/C SIR, individual directors may need Side A coverage to bridge the gap. Bankruptcy planning for SIR-funded businesses requires coordination of insurance, claim management, and capital planning. Practical context For Texas commercial parties using SIRs, careful coordination is essential. Best practice: (1) confirm whether SIR or deductible is in place, read policy language carefully; (2) maintain disciplined within-SIR claim management with reporting protocols; (3) coordinate within-SIR defense with insurer expectations to preserve excess coverage; (4) for material SIRs, retain experienced claims management, within-SIR mistakes can prejudice excess coverage; (5) document SIR exhaustion contemporaneously; (6) for D&O, ensure Side A coverage adequate to address Side B/C SIR-funding gaps in insolvency; (7) coordinate with captive insurance arrangements where applicable. Common pitfalls: businesses use SIRs for cost savings without infrastructure to manage within-SIR claims well, leading to excess coverage challenges and Stowers-type exposure. SIR adoption should be paired with claims management capability, not just cost savings. Related Terms Excess Insurance · Commercial General Liability Insurance · Stowers Doctrine · Directors and Officers Insurance · Reservation of Rights Series LLC § A Texas LLC that has established one or more designated series within itself. Each series may have separate members, managers, assets, and limitation of liability, properly maintained, the assets of one series are protected from the creditors of another series. A Texas series LLC is a Texas LLC that has established one or more designated series within itself. Each series may have separate members, managers, assets, and limitation of liability. Properly maintained, the assets of one series are protected from the creditors of another series and from the creditors of the LLC itself. The series LLC is most commonly used in real estate (one series per property), insurance, and complex investment structures. Authority Tex. Bus. Orgs. Code Subchapter M of Chapter 101: §§ 101.601–101.622 . Key provisions: § 101.601 (establishment); § 101.602 (enforcement of obligations); § 101.603 (notice of limitation in certificate of formation); § 101.604 (assets of series); § 101.605 (general powers); § 101.621 (winding up of series). Texas also recognizes "protected series" and "registered series" under amendments effective June 1, 2022 ( §§ 101.621–101.622 ). Establishment Under § 101.601 , a Texas LLC may establish one or more series within the LLC if (a) the LLC's certificate of formation provides notice that the LLC may have one or more series and that the debts and liabilities of one series are not enforceable against the assets of another series, and (b) the LLC's company agreement establishes the series. Both requirements must be satisfied to obtain inter-series liability protection. The internal liability shield Under § 101.602 , the debts, liabilities, obligations, and expenses incurred or contracted for or otherwise existing with respect to a particular series are enforceable against the assets of that series only, and not against the assets of any other series or against the assets of the LLC generally. This is the principal feature distinguishing a series LLC from a single LLC owning multiple assets. Notice requirements The internal liability shield is not automatic. It applies only if all of the following are satisfied: (1) the certificate of formation provides notice of the limitation; (2) the company agreement establishes the series; (3) the records maintained for the series account for the series' assets separately from the LLC's other assets and the assets of any other series; (4) the series' obligations and the persons who contract with the series have notice (constructive or actual) of the limitation. §§ 101.602–101.604 . Protected series and registered series (2022) Effective June 1, 2022, Texas added two additional series LLC structures. A protected series is the original Texas series structure, the series exists internally within the LLC. A registered series is a series that has filed a certificate of registered series with the Texas Secretary of State, providing a public filing for each series. Registered series are useful where third parties (lenders, title companies, insurers) require evidence of series existence. Separate operations To preserve the internal liability shield, each series should maintain separate books and records, separate bank accounts, separate insurance, and separate contracts. The series should sign in its own name (rather than the LLC's name), and counterparties should have actual or constructive notice that they are dealing with the series and not the LLC generally. Failure to maintain these formalities can result in the loss of inter-series protection, a "series-piercing" outcome that has not yet been definitively addressed by Texas appellate courts but which is widely anticipated based on principles applied in single-LLC veil-piercing. Tax treatment The federal income tax treatment of series LLCs remains unsettled. Treasury proposed regulations in 2010 that would have treated each series as a separate entity for federal tax purposes; the regulations were never finalized. In practice, most series LLC sponsors treat each series as a separate entity for tax purposes based on the structural separation, but the Internal Revenue Service has not issued definitive guidance. Practical context The Texas series LLC is most commonly used in real estate (one series per property, allowing inter-property liability separation without forming separate LLCs for each property), insurance vehicles, securitization structures, and complex investment partnerships. The principal advantages over forming separate LLCs are reduced filing fees and simplified administration. The principal disadvantages are the unsettled tax treatment, the unsettled treatment in non-Texas jurisdictions (some states do not recognize the inter-series liability shield), and the ease with which sloppy operations can compromise the protection. For most closely-held businesses, separate Texas LLCs remain the simpler, more conservative choice. Series LLCs work best where the cost savings and administrative simplicity meaningfully outweigh the legal uncertainty. Companion article: Starting a Business in Texas Related Terms Limited Liability Company · Member · Manager · Certificate of Formation · Company Agreement Service Mark § A word, name, symbol, or device used to identify and distinguish the services of one person from those of others. The services-equivalent of a trademark, governed by the same Lanham Act provisions and Texas trademark statute. Most "trademark" rights protecting brand names for services are technically service marks. A service mark is a word, name, symbol, or device used by a person to identify and distinguish the services of one person from the services of others. A service mark is the services-equivalent of a trademark, the same legal framework applies to both, with "trademark" used for goods and "service mark" used for services. Most consumer-facing brand protection in service-economy industries (consulting, hospitality, software-as-a-service, financial services, professional services) operates through service-mark rights. Authority Lanham Act, 15 U.S.C. § 1051 et seq., applies equally to service marks: § 1053 (registration of service marks); § 1127 (definitions). Texas Trademark Act, Tex. Bus. & Com. Code Ch. 16 : § 16.001(8) (service mark definition); § 16.051 (registrable marks include service marks); § 16.102 (infringement remedies). Texas common-law service-mark rights preserved by § 16.107 . Distinguishing trademark from service mark Trademarks identify and distinguish goods; service marks identify and distinguish services. The legal protections, registrability standards, and infringement standards are identical, but the use specimens required for federal registration differ, trademark specimens show the mark on the goods or packaging, while service-mark specimens show the mark in advertising or rendering of the services. Many marks are both: a software company's name may serve as a service mark for its SaaS service and as a trademark for boxed software. Registration Service-mark registration follows the same path as trademark registration: federal application to the USPTO; state-level application to the Texas Secretary of State; or unregistered use creating common-law rights. Service-mark applications must specify the services covered with reasonable specificity in International Class 35 through 45 (the services classes). The use-in-commerce requirement for federal registration requires that the services be rendered in commerce under the mark, promotional or planned use is insufficient under § 1051(a). Use in commerce For service marks, "use in commerce" means the mark is used or displayed in the sale or advertising of services rendered, with the services rendered in interstate commerce. This standard differs from goods, where the mark must be physically affixed to the goods. Display in advertising materials, websites, signage, invoices, or contracts is sufficient for service marks, provided the services are being rendered. Practical context For Texas service-economy businesses, law firms, consultancies, software companies, agencies, restaurants, healthcare practices, most outward-facing brand protection is service-mark protection. Federal registration (≈$350-$750 per class) provides nationwide constructive notice of ownership, presumptive validity, and incontestability after five years of continuous use. State registration is supplementary and inexpensive; common-law rights protect within the geographic area of actual use. Related Terms Trademark · Trade Dress · License Agreement · IP Assignment Settlement Agreement § A contract resolving a dispute, typically (though not exclusively) in connection with pending or threatened litigation. Standard terms include (1) consideration (typically a payment or other performance); (2) releases of claims; (3) confidentiality; (4) non-disparagement; (5) choice of law and forum; (6) representations about authority; (7) indemnification for breach. Settlement agreements are enforceable as contracts; in pending litigation, often coupled with a Rule 11 Agreement for procedural enforceability. A settlement agreement is a contract resolving a dispute, typically (though not exclusively) in connection with pending or threatened litigation. Settlement agreements are the principal mechanism for ending lawsuits short of trial, well over 90% of commercial cases resolve by settlement rather than judgment. The settlement agreement itself is a contract enforceable under general Texas contract law; in pending litigation, settlement agreements are typically coupled with a Rule 11 Agreement for additional procedural enforceability under Tex. R. Civ. P. 11 . Authority General contract law applies to settlement agreement enforcement. Procedural enforcement: Tex. R. Civ. P. 11 (see Rule 11 Agreement ). Foundational case: Padilla v. LaFrance , 907 S.W.2d 454 (Tex. 1995). Disclaimer of reliance and fraud defenses: Schlumberger Technology Corp. v. Swanson , 959 S.W.2d 171 (Tex. 1997); Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of America , 341 S.W.3d 323 (Tex. 2011). Statutory restrictions: Tex. Bus. & Com. Code § 17.42 (DTPA waiver bar). Tax treatment of settlements: 26 U.S.C. § 104(a)(2) (physical injury exclusion); 26 U.S.C. § 162(f) (deductibility limits for fines and penalties); 26 U.S.C. § 162(q) (post-2017 tax limit for sexual harassment settlements with NDA). Standard settlement agreement components Comprehensive commercial settlement agreements typically include: (1) recitals , describing the dispute and the parties' agreement to settle; (2) consideration , payment terms (lump sum, installment, structured settlement) or other performance; (3) releases , mutual or unilateral release of claims; (4) covenants not to sue , promises not to bring future actions on released matters; (5) confidentiality , restrictions on disclosing settlement terms or facts; (6) non-disparagement , restrictions on disparaging statements; (7) representations , authority to enter the agreement, no other claims, satisfaction of conditions; (8) indemnification , covering breach of representations or third-party claims; (9) choice of law and forum , typically Texas law and Texas venue; (10) integration , entire agreement clause; (11) amendment requirement , written amendment only; (12) specific performance , equitable remedies; (13) fees and costs , typically each party bears own. Confidentiality provisions Settlement confidentiality is heavily negotiated. Standard provisions: (1) terms confidentiality , settlement terms and amount cannot be disclosed; (2) fact confidentiality , underlying facts cannot be disclosed; (3) permitted disclosures , to attorneys, accountants, tax advisors, family members, court order, regulatory requirement; (4) liquidated damages for breach, given difficulty of proving damages, often a fixed amount per disclosure. Note: confidentiality of sexual-harassment settlements has been federally limited since 2017, under 26 U.S.C. § 162(q) , settlement payments and related attorney fees are not deductible if the settlement is subject to a non-disclosure agreement covering sexual harassment claims. Several states have also enacted statutes limiting confidentiality in similar contexts. Tax treatment of settlements Settlement tax treatment depends on the nature of the underlying claims: (1) physical injury settlements , generally excluded from gross income under § 104(a)(2); (2) employment discrimination settlements , typically taxable as wages or other income; (3) contract settlements , tax treatment depends on what the payment substitutes for (lost profits taxable, return of capital not); (4) punitive damages , always taxable; (5) attorney fees , often taxable to plaintiff even if paid directly to attorneys (above-the-line deduction available in some categories). Allocation of settlement payments among different claim categories has substantial tax consequences; settlement agreements should allocate carefully and consistently with the underlying claims. Court approval requirements Most commercial settlements do not require court approval. Exceptions: (1) class actions , court approval required under Rule 42 (Texas) or Rule 23 (federal); (2) minor or incompetent plaintiffs , guardian ad litem and court approval typically required; (3) bankruptcy proceedings , bankruptcy-court approval under Bankruptcy Rule 9019; (4) shareholder derivative suits , court approval required; (5) certain government-involvement settlements , DOJ or agency approval; (6) structured settlements , sometimes require court approval depending on circumstances. Enforcement of settlement agreements If a party breaches a settlement agreement, enforcement options include: (1) specific performance , court order requiring compliance; (2) contract damages , for breach; (3) liquidated damages , if specified; (4) attorney's fees , typically recoverable for enforcement under § 38.001 if in writing; (5) reinstatement of underlying claims , in some cases, breach of a settlement permits restoration of the underlying claims (often subject to credit for amounts paid). The proper enforcement procedure depends on whether the underlying litigation is dismissed: if dismissed with prejudice, the new claim is for breach of settlement; if dismissed without prejudice, the underlying claims may be re-filed. Common drafting issues Recurring sources of settlement disputes: (1) scope ambiguity in releases , see Release ; (2) missing affiliated parties , release covers signatories but not affiliates; (3) contingent obligations , payment conditioned on events that prove difficult; (4) tax allocation , disputes over characterization of payments; (5) confidentiality scope , what's covered, what's permitted disclosure; (6) competing interpretation of operative terms . Sophisticated commercial settlements should be drafted by experienced counsel; templates rarely capture the specific dispute's nuances. Practical context For Texas commercial litigants, settlement-agreement drafting is among the highest-leverage moments in any case. Best practice: (1) align settlement timing with payment terms, most defendants prefer payment after release execution; most plaintiffs prefer payment before; (2) draft releases comprehensively with affiliated parties, future claims, and disclaimer of reliance; (3) coordinate Rule 11 filing with settlement agreement execution; (4) consider tax allocation carefully, improper allocation can shift hundreds of thousands of dollars in tax burden; (5) for confidential settlements, consider whether NDA falls under § 162(q) and other federal/state limits; (6) include specific-performance language and attorney's fees provision for enforcement. Settlement agreements are contracts, they should be drafted with the same care as any commercial contract, not rushed at the close of mediation. Related Terms Release · Rule 11 Agreement · Mediation · Confidentiality Agreement · Severance Agreement Severance Agreement § A contract between an employer and a departing employee under which the employer provides specified compensation, benefits continuation, or other consideration in exchange for the employee's release of legal claims and other negotiated obligations. A severance agreement is a contract between an employer and a departing employee under which the employer provides specified compensation, benefits continuation, or other consideration in exchange for the employee's release of legal claims against the employer and other negotiated obligations. Severance is generally voluntary on the employer's part, Texas law does not require severance pay absent contract or company policy. Authority General contract law. Federal Older Workers Benefit Protection Act (OWBPA), 29 U.S.C. § 626(f) (governing waivers of age-discrimination claims); Tex. Lab. Code Ch. 21 (Texas Commission on Human Rights Act, releases); ERISA (where severance plans qualify as ERISA-covered welfare benefit plans). Typical structure (1) Severance compensation (lump sum, salary continuation, or a combination); (2) benefits continuation (typically COBRA-related); (3) general release of claims, broadly worded; (4) reaffirmation of confidentiality, noncompete, and nonsolicitation obligations from prior agreements; (5) non-disparagement; (6) cooperation in transition or litigation; (7) return of property. OWBPA requirements (age 40+) For releases of Age Discrimination in Employment Act claims by employees age 40 or older, the OWBPA requires: (1) plain-language drafting; (2) specific reference to ADEA rights; (3) advice to consult an attorney; (4) at least 21 days to consider (45 days for group reductions); (5) at least 7 days to revoke after signing; (6) consideration beyond what the employee was already entitled to receive. Failure renders the ADEA waiver unenforceable. Texas-specific considerations Releases of Texas Commission on Human Rights Act claims under Tex. Lab. Code Ch. 21 are generally enforceable if knowing and voluntary. Releases cannot waive future claims, FLSA wage claims (which require DOL or court approval to compromise), or workers' compensation claims for injuries already sustained. Tax treatment Severance is wages, subject to income tax withholding and employment taxes. Allocations to non-wage components (e.g., release of personal injury claims) may be tax-advantaged but invite IRS scrutiny. Practical context Severance agreements are negotiated documents. Employees should understand they are waiving claims they may not yet recognize as available; employers should ensure OWBPA compliance for age-40+ employees and clear documentation of consideration beyond what was already earned or owed. Companion article: Before Firing an Employee in Texas Related Terms Employment Agreement · At-Will Employment · Workplace Discrimination · Final Paycheck · Wrongful Termination Shareholder § 2025 The owner of one or more shares of stock in a Texas corporation. Shareholders elect the board of directors, vote on certain fundamental corporate transactions, and receive dividends when declared. Shareholders generally do not manage the corporation directly. A shareholder is the owner of one or more shares of stock in a Texas corporation. Shareholders are the corporation's equity owners; they elect the board of directors, vote on certain fundamental corporate transactions, and receive dividends when declared. Shareholders generally do not manage the corporation directly, that authority is vested in the board under TBOC § 21.401 . Authority Tex. Bus. Orgs. Code § 1.002 (definitions); Subchapter H of Chapter 21 (shareholder meetings, notice, voting, quorum); §§ 21.151–21.171 (share issuance, classes, rights); § 21.218 (books and records inspection, as amended by SB 29 eff. May 14, 2025); §§ 21.551–21.563 (derivative proceedings). Core rights Voting. Shareholders elect directors at each annual meeting ( § 21.405 ) and vote on fundamental transactions including mergers, conversions, sales of substantially all assets, certificate amendments, and dissolution. Voting is typically one vote per share; the certificate may create classes with different voting rights, including non-voting classes. Dividends. Declared by the board in its discretion. The corporation may not declare a dividend that would render it insolvent. § 21.303 . Books and records inspection. Under § 21.218 , a shareholder of record for at least six months or holding 5% of outstanding shares may examine specified records on written demand stating a proper purpose. As amended by SB 29 effective May 14, 2025 , the inspection right was significantly narrowed: emails, text messages, and social media communications are excluded unless those communications effectuate corporate action . New § 21.218(b-2) permits publicly-traded corporations and § 21.419 opt-in corporations to deny inspection demands made in connection with active or anticipated derivative proceedings. Derivative actions. Under §§ 21.551–21.563 , a shareholder may sue on behalf of the corporation when management fails to do so. See Derivative Action. Shareholder liability Under § 21.223 , a shareholder is not liable for the corporation's obligations merely by reason of being a shareholder, with limited exceptions for veil-piercing, contractual guarantees, and statutory liability for unauthorized distributions. No vested property right Under § 21.051 , a shareholder has no vested property right resulting from the certificate of formation. The certificate may be amended without unanimous shareholder consent, subject to procedural protections and class-vote rights. Closely held corporations TBOC § 21.563 defines a "closely held corporation" as one with fewer than 35 shareholders and no public market. Closely held corporation shareholders have substantially better procedural advantages in derivative actions, including no demand requirement and direct recovery if justice requires. See Closely Held Corporation. Practical context Shareholder practice in Texas was substantially reshaped by SB 29 (effective May 14, 2025), which narrowed inspection rights, codified the business judgment rule, and authorized exclusive-forum and ownership-threshold restrictions on derivative actions. The cumulative effect makes Texas substantially more director-friendly than before May 2025, particularly for publicly-traded and § 21.419 opt-in corporations. Closely-held corporation shareholders under § 21.563 retain their pre-SB 29 procedural advantages. Companion article: Raising Capital in Texas Related Terms Corporation · Director · Bylaws · Derivative Action · Business Judgment Rule · Closely Held Corporation Shareholder Agreement § 2025 A contract among shareholders of a corporation that supplements the certificate of formation and bylaws by addressing matters such as voting, transfers, buy-sell rights, and dispute resolution. A shareholder agreement is a contract among the shareholders of a corporation that supplements the certificate of formation and bylaws. Common provisions include voting agreements (requiring shareholders to vote together on specified matters), transfer restrictions (right of first refusal, drag-along, tag-along rights), buy-sell mechanics (mandatory purchase upon death, disability, departure, or dispute), valuation procedures (formula vs. appraisal), and dispute-resolution provisions (mediation, arbitration, forum-selection). Shareholder agreements are particularly important in closely held corporations where the parties have negotiated for specific rights that go beyond the default rules of the corporate code. They also play a central role in family-business succession planning, where buy-sell mechanics determine how shares move between generations or branches of the family. In multi-owner businesses, well-drafted shareholder agreements are the most effective tool for preventing partner disputes from becoming litigation. Authority Texas shareholder agreements operate under Tex. Bus. Orgs. Code § 21.101 and the related provisions in Subchapter B of Chapter 21. Related-party transactions among shareholders, directors, and officers are governed by § 21.418 . Permitted scope For-profit corporations governed by the Texas Business Organizations Code may enter into shareholder agreements that vary the default rules under § 21.101 , subject to certain limits. Shareholder agreements may, among other things, eliminate or limit the powers of the board, govern distributions, restrict transfers, require specified buy-sell mechanics, and authorize binding dispute resolution. Recent developments Senate Bill 29 (effective May 14, 2025) authorized shareholder agreements to include jury waivers and exclusive forum-selection clauses for internal entity claims ( TBOC §§ 2.115 and 2.116 ). The codified business judgment rule in § 21.419 also interacts with shareholder agreement provisions allocating director protection. Shareholder Oppression § A historical Texas common-law doctrine recognized from 1988 through 2014 under which a minority shareholder could pursue a direct cause of action for harsh or wrongful conduct by majority shareholders. After Ritchie v. Rupe (2014), Texas no longer recognizes the common-law action; the term now refers narrowly to a statutory ground for rehabilitative receivership. "Shareholder oppression" historically referred to a Texas common-law doctrine, recognized from 1988 through 2014, under which a minority shareholder of a closely-held corporation could pursue a direct cause of action and obtain equitable relief (including a court-ordered buyout) when controlling shareholders engaged in conduct that defeated the minority's reasonable expectations. After Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014), Texas no longer recognizes a common-law cause of action for minority shareholder oppression. The term now refers narrowly to a statutory ground for rehabilitative receivership under TBOC § 11.404(a)(1)(C) . Authority Tex. Bus. Orgs. Code § 11.404 (rehabilitative receivership); § 11.405 (conversion to liquidating receivership); Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014); Davis v. Sheerin , 754 S.W.2d 375 (Tex. App.-Houston [1st Dist.] 1988, writ denied) (foundational pre- Ritchie decision, no longer controlling); Patton v. Nicholas , 154 Tex. 385, 279 S.W.2d 848 (1955). The pre-Ritchie doctrine From 1988 through 2014, Texas appellate courts recognized a common-law cause of action where majority-shareholder conduct (a) substantially defeated the minority's reasonable expectations or (b) constituted harsh or wrongful conduct departing from fair-dealing standards. Courts granted equitable remedies including court-ordered buyouts at fair value, dividend mandates, and removal of oppressive directors. The Ritchie v. Rupe decision (2014) In a 6–3 decision, the Texas Supreme Court fundamentally restructured the landscape: (1) No common-law cause of action. Texas became one of a small number of states with no common-law oppression cause of action. (2) Statutory remedy is exclusive. TBOC § 11.404 provides the exclusive Texas remedy for shareholder oppression, foreclosing court-ordered buyouts under the statute. (3) Narrow definition. "Oppressive" under § 11.404(a)(1)(C) requires all four of: (a) abuse of authority by management; (b) intent to harm one or more shareholders; (c) action that does not comport with the honest exercise of business judgment; and (d) creation of a serious risk of harm to the corporation itself. The fourth element is particularly difficult, many minority-harming "freeze-out" tactics may not harm the corporation. (4) Remedy is limited to rehabilitative receivership. Even where oppression is established, court-ordered buyouts are not available under § 11.404 . What survives after Ritchie Derivative breach-of-fiduciary-duty claims under TBOC §§ 21.551–21.563 with closely-held-corporation procedural advantages. The principal post- Ritchie mechanism. Sneed v. Webre , 465 S.W.3d 169 (Tex. 2015), reinforced this avenue. Informal fiduciary duty claims arising from a "moral, social, domestic, or purely personal relationship of trust and confidence prior to and independent of the parties' business relationship." Ritchie , 443 S.W.3d at 874. Court-ordered buyouts may be available as remedy. Id. at 892 n.32. Rehabilitative receivership under § 11.404 , narrow but available where the four-element test is met. Judicial dissolution under § 11.314 , for LLCs and partnerships only. Not subject to Ritchie 's narrow oppression test. See Judicial Dissolution. Contractual remedies under shareholders' agreements, buy-sell agreements, employment contracts. Practical context Ritchie v. Rupe did not eliminate minority shareholder protections; it shifted them. The protections that survive are largely fiduciary-based rather than expectation-based, derivative rather than direct, and contractual rather than common-law. The most consequential practical lesson is that minority shareholders cannot rely on courts to backfill the protections that careful drafting at formation should have provided. Companion article: Your Business Partner Wants Out Related Terms Closely Held Corporation · Derivative Action · Fiduciary Duty · Judicial Dissolution · Business Judgment Rule · Business Divorce Software License Agreement § A negotiated commercial license under which the licensor grants the licensee specified rights to install, access, and use software, typically on the licensee's own infrastructure. Distinct from a SaaS agreement (services-based, vendor-hosted) and a consumer EULA (form, non-negotiated). Key terms: scope of license, seats/users, deployment environment, support and maintenance, source-code escrow, warranty, indemnification, and limitation of liability. A software license agreement is a negotiated commercial contract under which the licensor grants the licensee specified rights to install, access, and use software, typically on the licensee's own infrastructure ("on-premise") or hosted by the licensee in a third-party cloud. The software license agreement is distinct from a SaaS agreement (services-based, vendor-hosted) and a consumer EULA (form, non-negotiated). It is the principal commercial document for enterprise software transactions where the licensee will run the software in its own environment. Authority Copyright Act, 17 U.S.C. § 117 (limitations on exclusive rights for computer programs). Texas UETA, Tex. Bus. & Com. Code Ch. 322 . UCC Article 2 may apply where the transaction is principally for the sale of goods that include software ( Tex. Bus. & Com. Code Ch. 2 ). Texas common-law contract principles. Enforcement of license restrictions: MAI Systems Corp. v. Peak Computer, Inc. , 991 F.2d 511 (9th Cir. 1993). License grant and scope The license grant defines (1) permitted uses, install, copy, run, modify, integrate, internal-only, restricted to specific affiliates; (2) the user metric, named users, concurrent users, CPU cores, instances, or capacity-based; (3) the environment, production, development, testing, disaster recovery; (4) territorial restrictions; and (5) duration, perpetual, term, or subscription. Each enumerated right is a separate grant; rights not granted are reserved. Support, maintenance, and service levels Most software license agreements include a separate exhibit or appendix governing support and maintenance, typically a recurring fee equal to 18-22% of the license fee per year. Support exhibits define severity levels, response time SLAs, escalation procedures, and the version/release support window. The licensor's right to discontinue support of older versions is a critical negotiation point for licensees with long deployment cycles. Source-code escrow Source-code escrow protects the licensee against the licensor's bankruptcy, acquisition, or discontinuation of the product. Source code is deposited with a neutral escrow agent (typically Iron Mountain, EscrowTech, or NCC Group), updated on each major release. Release events, defined contractually, trigger delivery of the source code to the licensee for limited maintenance purposes. Standard release events: licensor bankruptcy, cessation of business, material breach of support obligations, or acquisition followed by support discontinuation. Warranty and limitation of liability Standard licensor warranties cover (1) ownership and authority to grant the license; (2) limited media warranty (90 days, replacement remedy); (3) general performance warranty for a defined warranty period (typically 90 days, replacement remedy); and (4) IP non-infringement, with carve-outs for licensee modifications, combinations, and post-knowledge use. Limitation of liability typically caps damages at fees paid in the preceding 12 months, with carve-outs for IP indemnification, breach of confidentiality, and gross negligence/willful misconduct. Practical context Enterprise software license agreements have evolved as SaaS has become dominant. On-premise software licensing is now most common for (1) heavily regulated industries with data-residency or sovereignty requirements; (2) industrial control systems and manufacturing software; (3) legacy enterprise applications; and (4) software with extreme performance requirements unsuited to multi-tenant SaaS. Texas businesses negotiating these agreements should pay particular attention to source-code escrow, support discontinuation rights, and IP indemnification carve-outs. Related Terms License Agreement · SaaS Agreement · End User License Agreement · Open-Source License · Master Service Agreement Special Meeting § A meeting of shareholders other than the annual meeting, called for a specific purpose stated in the meeting notice. Business at a special meeting is limited to the purposes stated in the notice. A special meeting of shareholders is a meeting other than the annual meeting, called for a specific purpose stated in the meeting notice. Business at a special meeting is limited to the purposes stated in the notice. Authority Tex. Bus. Orgs. Code § 21.352 (special meetings); § 21.353 (notice); § 21.3521 (remote communication). Who may call Under § 21.352(a) , a special meeting may be called by (1) the president, the board of directors, or any other person authorized by the certificate of formation or bylaws; or (2) holders of the percentage of shares specified in the certificate of formation, not to exceed 50% of shares entitled to vote. If no percentage is specified, the threshold is 10% of shares entitled to vote. Purpose limitation Under § 21.352(c) , other than procedural matters, the only business that may be conducted at a special meeting is business within the purposes described in the notice. This is a significant procedural protection, shareholders cannot be ambushed at a special meeting with business they were not warned about. Record date Unless the bylaws provide otherwise, the record date for shareholders entitled to call a special meeting is the date the first shareholder signs the notice. § 21.352(b) . Practical context Special meetings are the standard mechanism for shareholder votes on transactions outside the ordinary annual cycle, mergers, asset sales, certificate amendments, and contested director elections. The 50%-cap on shareholder-call thresholds protects minority shareholders; a corporation cannot draft a certificate that requires a supermajority above 50% to call a special meeting. Related Terms Annual Meeting · Shareholder · Quorum · Voting Spoliation § The intentional or negligent destruction, alteration, or failure to preserve evidence relevant to litigation. Texas spoliation framework was substantially clarified in Brookshire Bros., Ltd. v. Aldridge, 438 S.W.3d 9 (Tex. 2014), which held that a spoliation jury instruction generally requires intentional spoliation, with a narrow exception for negligent spoliation that irreparably deprives a party of meaningful ability to present a claim or defense. The duty to preserve evidence arises when litigation is reasonably anticipated. Spoliation is the intentional or negligent destruction, alteration, or failure to preserve evidence relevant to litigation. The doctrine implicates both substantive law (defining when a duty to preserve arises) and procedural law (defining remedies when the duty is breached). The Texas spoliation framework was substantially clarified in Brookshire Bros., Ltd. v. Aldridge , 438 S.W.3d 9 (Tex. 2014), which raised the bar for spoliation jury instructions to require intentional conduct in most circumstances. Authority Foundational modern Texas case: Brookshire Bros., Ltd. v. Aldridge , 438 S.W.3d 9 (Tex. 2014). Earlier framework: Trevino v. Ortega , 969 S.W.2d 950 (Tex. 1998); Wal-Mart Stores, Inc. v. Johnson , 106 S.W.3d 718 (Tex. 2003). Sanctions framework imported from: TransAmerican Natural Gas Corp. v. Powell , 811 S.W.2d 913 (Tex. 1991). Federal counterpart for ESI: Fed. R. Civ. P. 37(e) . Discovery framework: Tex. R. Civ. P. 192-193 . Sanctions: Tex. R. Civ. P. 215 . The two-step Brookshire framework Brookshire Bros. v. Aldridge (Tex. 2014) established a two-step process for analyzing spoliation: (1) Did spoliation occur? , A question of law for the trial court (not the jury). The court determines whether (a) a duty to preserve existed, (b) the duty was breached, and (c) the spoliation was intentional or negligent. (2) What is the appropriate remedy? , The trial court's discretion, applying TransAmerican proportionality factors. Spoliation evidence is admissible to the jury only insofar as it bears on the substantive merits; the spoliation determination itself is for the court. The duty to preserve The duty to preserve evidence arises when "a party knows or reasonably should know that there is a substantial chance that a claim will be filed and that evidence in its possession or control will be material and relevant to that claim" (Brookshire, citing Wal-Mart Stores v. Johnson). "Substantial chance" means more than mere possibility but does not require certainty, it is "more than merely an abstract possibility or unwarranted fear." Common triggers: (1) specific demand letter or threat of suit ; (2) knowledge of an injury or claim event ; (3) internal awareness of significant exposure ; (4) regulatory inquiry that could lead to litigation; (5) litigation hold notices from counsel. Scope of the duty Once triggered, the duty extends to evidence the party knows or reasonably should know is relevant to the anticipated litigation. The duty is not absolute, parties are not required to preserve every document in their possession indefinitely. Courts apply reasonableness: (1) the importance of the evidence; (2) the burden of preservation; (3) the party's knowledge of relevance; (4) the proportionality of preservation to the dispute. Routine document destruction policies must be suspended for documents covered by the duty; failure to suspend can support spoliation findings. Intentional vs. negligent spoliation, the instruction question The most consequential Brookshire holding: a spoliation jury instruction (which permits the jury to draw an adverse inference from the destruction) generally requires intentional spoliation. "Intentional" means the party "acted with the subjective purpose of concealing or destroying discoverable evidence." Mere negligent failure to preserve, even with significant resulting prejudice, generally does not support a jury instruction. Brookshire substantially raised the bar from earlier doctrine which permitted instructions for negligent spoliation. The "willful blindness" expansion Brookshire includes "willful blindness" within the intentional category, a party who does not directly destroy evidence known to be relevant and discoverable, but allows it to be destroyed (e.g., by failing to suspend routine destruction processes after notice). Willful blindness fills the gap between pure intent and pure negligence; it captures conduct where the party was on notice but failed to act, with consequences functionally indistinguishable from intentional destruction. The doctrine ensures that sophisticated parties cannot evade the intent requirement by simply not paying attention. The narrow exception for irreparable prejudice Brookshire recognized a narrow exception to the intent requirement: "if the act of spoliation, although merely negligent, so prejudices the nonspoliating party that it is irreparably deprived of having any meaningful ability to present a claim or defense." In such cases, a spoliation instruction may be appropriate even without intentional spoliation. The exception is genuinely narrow, courts apply it only where the destroyed evidence was so central that the case cannot fairly proceed without it. Most spoliation findings in Texas now hinge on the intent vs. negligence distinction with the irreparable-prejudice exception serving as a safety valve. Remedies, the spectrum Trial-court remedies available for spoliation, in approximate order of severity: (1) monetary sanctions , payment of opposing party's attorney's fees and costs related to the spoliation issue; (2) cost-shifting , for additional discovery occasioned by the destruction; (3) evidentiary exclusions , preventing the spoliating party from offering certain evidence; (4) spoliation instruction , requires intentional spoliation (or irreparable prejudice from negligent spoliation); (5) striking pleadings , case-dispositive sanction subject to TransAmerican due-process limits; (6) dismissal or default judgment , most severe; available only for the most egregious cases. ESI considerations Electronic evidence presents distinctive spoliation challenges: (1) routine destruction through email retention policies, server overwriting; (2) BYOD/personal device evidence subject to limited corporate control; (3) cloud storage evidence held by third parties; (4) ephemeral messaging apps designed to delete; (5) backup tape obsolescence and recovery cost. Federal Rule 37(e) provides a more detailed ESI-specific spoliation framework than Texas state-court doctrine; many sophisticated commercial cases are litigated in federal court partly because of the rule's clarity. Practical context For Texas commercial parties, spoliation discipline begins long before suit is filed. Best practice: (1) implement litigation-hold protocols triggered by demand letters, regulatory inquiries, or internal awareness of significant exposure; (2) suspend routine document destruction for held categories; (3) document preservation actions contemporaneously, preservation memos, hold notices, custodian acknowledgments; (4) preserve more rather than less when duty triggers are unclear; (5) for ESI, coordinate with IT to ensure preservation reaches backup tapes, cloud storage, and personal devices; (6) post-suit, work with opposing counsel to define preservation scope through Rule 26-style negotiations; (7) for plaintiffs, document evidence of opposing-party spoliation contemporaneously, these become motion materials. Sophisticated commercial litigation increasingly turns on preservation discipline; counsel who manage spoliation risk effectively gain substantial leverage. Related Terms Sanctions · Discovery · Expert Witness Disclosure · Summary Judgment · Motion in Limine Statute of Frauds § The doctrine that certain categories of contracts are unenforceable unless evidenced by a writing signed by the party to be charged. Texas codifies the statute of frauds for general contracts at Tex. Bus. & Com. Code Ch. 26 and for sales of goods at § 2.201. The statute of frauds is the doctrine that certain categories of contracts are unenforceable unless evidenced by a writing signed by the party to be charged. Texas codifies the statute of frauds for general contracts at Tex. Bus. & Com. Code Chapter 26 and for sales of goods at § 2.201 . Authority Tex. Bus. & Com. Code Ch. 26 (general statute of frauds): § 26.01 (writing requirement); § 26.02 (loan agreements); §§ 26.01(b)(1)–(7) (specific covered categories). UCC sales: Tex. Bus. & Com. Code § 2.201 . Real estate: Tex. Prop. Code § 5.021 . Categories requiring a writing (§ 26.01) (1) Promises to answer for the debt of another (suretyship, guaranty); (2) agreements made in consideration of marriage; (3) contracts for the sale of real estate; (4) leases of real estate for more than one year; (5) agreements not to be performed within one year from making; (6) commissions for sales of real estate or oil and gas; (7) agreements to lend money in excess of $50,000 ( § 26.02 for loan agreements); (8) physician contracts to cure or warrant medical results. Sale of goods (§ 2.201) Contracts for the sale of goods for $500 or more must be evidenced by a writing, with several exceptions (specially manufactured goods, admission in litigation, partial performance, merchant confirmation rule). See Sale of Goods . Required writing The writing need not be a single document, formal contract, or include all material terms. It must (1) indicate that a contract was made; (2) be signed by the party to be charged; and (3) identify the subject matter with reasonable certainty. An exchange of emails, text messages, or other electronic communications can satisfy the requirement under the Texas Uniform Electronic Transactions Act ( Tex. Bus. & Com. Code Ch. 322 ). Main purpose doctrine A common-law exception to the suretyship/guaranty writing requirement: where the guarantor's primary purpose in promising to pay another's debt is to advance the guarantor's own economic interest, the oral promise may be enforceable. Practical context Statute-of-frauds defenses are frequently raised but rarely dispositive at the motion-to-dismiss stage; most disputes turn on whether the writing is sufficient and the party-to-be-charged signed. Modern electronic communication has made the "writing" element easier to satisfy than in earlier eras. The doctrine remains a meaningful trap for oral side agreements modifying written contracts. Companion article: Contract Disputes in Texas Related Terms Sale of Goods · Guaranty Agreement · Promissory Note · Commercial Lease Statute of Limitations § A statute that bars a cause of action after a specified period from accrual. Texas limitations periods are codified principally in Tex. Civ. Prac. & Rem. Code Ch. 16: 2 years (most torts, DTPA, wrongful death), 4 years (contracts, fraud, real property), 5 years (specific actions). The discovery rule may toll accrual in specific contexts. Distinct from statutes of repose (fixed external event regardless of accrual). Multiple tolling and exception doctrines apply. A statute of limitations is a statute that bars a cause of action after a specified period from accrual. The doctrine serves multiple purposes: providing finality and repose, requiring prompt pursuit of claims while evidence is fresh, and protecting defendants from stale claims. Texas limitations periods are codified principally in Chapter 16 of the Civil Practice and Remedies Code, with cause-specific periods ranging from one year (defamation) to ten years (judgments). Limitations is a defense, the defendant must affirmatively plead and prove it. Authority Texas limitations framework: Tex. Civ. Prac. & Rem. Code Ch. 16 : § 16.001 (effect on limitations); § 16.002 (one-year limitations, defamation, malicious prosecution); § 16.003 (two-year limitations, most torts, wrongful death, conversion); § 16.004 (four-year limitations, contracts, fraud, real property, debt); § 16.051 (residual four-year, actions not otherwise specified); § 16.063 (tolling for absence from state); § 16.064 (tolling for plaintiff's disability); § 16.069 (counterclaim tolling). Discovery rule: Computer Associates Int'l, Inc. v. Altai, Inc. , 918 S.W.2d 453 (Tex. 1996); Velsicol Chem. Corp. v. Winograd , 956 S.W.2d 529 (Tex. 1997). Fraudulent concealment doctrine: S.V. v. R.V. , 933 S.W.2d 1 (Tex. 1996). Common limitations periods Frequently encountered Texas limitations periods: (1) 1 year , defamation (libel and slander); malicious prosecution; (2) 2 years , most torts (negligence, trespass, conversion, intentional torts); wrongful death; survival claims; DTPA (separate § 17.565); (3) 4 years , contracts (oral and written); fraud; real property recovery; debt; usury (special); breach of fiduciary duty; (4) 5 years , adverse possession (specific scenarios); (5) 10 years , judgments (renewal required to extend); adverse possession (other scenarios). The rule of thumb: torts run 2 years, contracts run 4 years, with significant exceptions in both directions. Accrual, when the clock starts Limitations runs from accrual, the date the cause of action accrues. Default rule: a cause of action accrues when "facts come into existence which authorize a claimant to seek a judicial remedy" (Computer Associates v. Altai). Specific accrual rules: (1) contract claims , accrue at breach; (2) tort claims , accrue at injury; (3) fraud claims , accrue at the fraudulent act, but discovery rule typically applies; (4) continuing torts , accrue at each occurrence; (5) installment contracts , separate accrual for each missed installment, unless acceleration. Accrual analysis is fact-specific; sophisticated parties dispute accrual dates frequently. The discovery rule The discovery rule tolls accrual until the plaintiff knows or, in the exercise of reasonable diligence, should have known of the injury and its cause. Texas applies the discovery rule selectively, not to all causes of action but to specific categories where the injury is inherently undiscoverable: (1) medical malpractice ; (2) fraud (where the defendant concealed the wrongdoing); (3) fiduciary breach in some contexts; (4) certain professional negligence . The discovery rule does not generally apply to ordinary contract or tort claims with overt injuries. Plaintiffs invoking the discovery rule bear the burden of pleading and proving the elements. Fraudulent concealment Fraudulent concealment is a related but distinct doctrine: where the defendant knew of the wrongdoing and concealed it, limitations is tolled until the plaintiff discovers (or should have discovered) the wrongdoing. Unlike the discovery rule (which is a substantive accrual rule), fraudulent concealment is an equitable estoppel doctrine. S.V. v. R.V. (Tex. 1996) is the foundational case. Elements: (1) defendant's actual knowledge of the wrong; (2) duty to disclose; (3) fixed purpose to conceal; (4) actual concealment. Plaintiffs invoke fraudulent concealment to defeat limitations defenses where their claim was timely-filed but for the concealment. Tolling and exceptions Multiple Texas tolling doctrines: (1) plaintiff's disability , minority, mental incapacity (§ 16.001); (2) defendant's absence from state , § 16.063; (3) counterclaim tolling , § 16.069 (counterclaims arising from same transaction tolled by main claim filing); (4) fraudulent concealment , equitable estoppel; (5) continuing tort , accrual restarts at each new occurrence; (6) contractual extension , parties may sometimes extend limitations by agreement; (7) court-ordered tolling in bankruptcy and similar contexts. Each tolling doctrine has specific elements and limits. Limitations vs. repose Statutes of limitations and statutes of repose are distinct: (1) limitations runs from accrual (when the cause of action arose); subject to discovery rule and tolling doctrines; affects the remedy. (2) repose runs from a fixed external event (substantial completion of construction, sale of product); not subject to discovery rule or most tolling; extinguishes the underlying right. See Statute of Repose . Repose periods are typically longer than limitations but provide an absolute outer boundary. Limitations as affirmative defense Limitations is an affirmative defense, the defendant must plead it specifically (Tex. R. Civ. P. 94) and prove its elements. The plaintiff bears no initial burden to establish timeliness; once the defendant pleads limitations, the burden shifts to the plaintiff to establish (a) timely filing, (b) applicability of a tolling doctrine, or (c) inapplicability of the asserted limitations period. Failure to plead limitations waives the defense; subsequent motions for summary judgment or dismissal cannot restore a waived defense. Practical context For Texas commercial parties, limitations is among the most common defenses raised in commercial litigation. Best practice for plaintiffs: (1) calendar limitations dates from accrual, with substantial buffer (file 6+ months before expiration where possible); (2) for ambiguous accrual, file early and litigate the date later; (3) preserve discovery-rule and fraudulent-concealment evidence contemporaneously; (4) consider counterclaim tolling for cross-claims arising from the same transaction. For defendants: (1) plead limitations promptly under Rule 94; (2) build limitations defenses with specific accrual dates and supporting documents; (3) raise the affirmative defense in summary-judgment proceedings to test enforceability; (4) for repeat-pattern defendants, develop standardized limitations analysis frameworks. The single most common cause of malpractice claims against plaintiff-side counsel: missed limitations deadlines. Calendaring discipline is foundational. Related Terms Statute of Repose · Deceptive Trade Practices Act · Statute of Frauds · Summary Judgment · Tortious Interference Statute of Repose § A statutory bar that extinguishes a cause of action after a specified period from a defined event, typically completion of work, sale of a product, or another fixed reference point, regardless of when the injury occurs or is discovered. Distinct from a statute of limitations, which runs from accrual. Texas has statutes of repose for architects, engineers, and surveyors (10 years), contractors (10 years), and products liability (15 years). A statute of repose is a statutory bar that extinguishes a cause of action after a specified period from a defined event, typically completion of work, sale of a product, or another fixed reference point, regardless of when the injury occurs or whether the injury has been discovered. Statutes of repose are distinct from statutes of limitations: limitations run from accrual (when the cause of action accrues, including discovery rules); repose runs from a fixed external event regardless of when the cause of action accrues. Repose periods are typically longer than limitations periods, but provide an absolute outer boundary that limitations does not. Authority Texas statutes of repose: Tex. Civ. Prac. & Rem. Code § 16.008 (architects, engineers, interior designers, landscape architects, 10 years from substantial completion of improvement); § 16.009 (contractors of improvements to real property, 10 years from substantial completion); § 16.011 (surveyors, 10 years from completion of survey); § 16.012 (products liability, 15 years from sale, with limited exceptions). Foundational case applying repose: Trinity River Authority v. URS Consultants, Inc.-Texas , 889 S.W.2d 259 (Tex. 1994). Distinction from limitations: Galbraith Eng'g Consultants, Inc. v. Pochucha , 290 S.W.3d 863 (Tex. 2009). Repose vs. limitations, the critical distinction Statutes of limitations and statutes of repose differ in several material ways: (1) starting event , limitations runs from accrual (typically when injury occurs or is discovered); repose runs from a fixed event (substantial completion, sale of product). (2) discovery rule , limitations is typically subject to the discovery rule (clock tolls until injury is or should be discovered); repose is not subject to discovery, the period runs regardless of injury or knowledge. (3) nature of the bar , limitations affects the remedy (procedural); repose may extinguish the underlying right (substantive). (4) length , repose periods are typically longer (10-15 years) than limitations periods (often 2-4 years). Construction repose, § 16.008 and § 16.009 Sections 16.008 and 16.009 establish parallel 10-year repose periods for architects/engineers/surveyors and contractors of improvements to real property. The 10-year period runs from substantial completion of the improvement. Claims for design defects, construction defects, structural failures, and similar causes of action against construction-industry defendants are extinguished after 10 years from substantial completion, regardless of when defects manifest. The repose statutes apply across cause-of-action types, negligence, breach of contract, breach of warranty, products liability, wherever a construction-industry defendant is sued in connection with the underlying construction. Products liability repose, § 16.012 Section 16.012 establishes a 15-year repose period for products liability actions against manufacturers and sellers, running from the date the product was first sold (in some cases, 15 years from delivery to the first owner). Several exceptions and exclusions apply: (1) the period does not run if the manufacturer expressly represented a longer useful life; (2) does not apply where the manufacturer failed to comply with FDA requirements for products subject to FDA regulation; (3) various other narrow exclusions for specific product categories. Aircraft and certain specialized products have longer or shorter repose periods under federal law. Computation issues The reference event for repose computation can itself be litigated: (1) "substantial completion" for construction, typically the date the work is complete enough for its intended use, or the date a certificate of occupancy is issued, or the date the owner takes possession; (2) "date of sale" for products, typically the date of first sale to a consumer, but can be earlier (sale to retailer) or later (date of delivery). Courts apply the statutes' definitional terms strictly; ambiguous reference events can result in case-dispositive disputes over whether the repose period has expired. Tolling and exceptions Statutes of repose are typically not subject to common-law tolling doctrines that apply to limitations (continuing tort, discovery rule, equitable tolling). The whole point of repose is to provide an absolute outer boundary regardless of these doctrines. Limited statutory exceptions: fraudulent concealment of the cause of action may toll repose in some circumstances. Continuing duties (failure to warn, ongoing maintenance obligations) may extend liability beyond initial repose periods if the duties create independent causes of action with their own accrual dates. Constitutional challenges Statutes of repose have been challenged on Texas Open Courts Clause grounds, that they unconstitutionally bar claims before they accrue, denying victims any opportunity to bring suit. Texas appellate courts have generally upheld the repose framework as constitutional, recognizing the legislature's authority to balance access-to-justice against finality and economic certainty. Specific applications can be challenged on as-applied constitutional grounds in particularly compelling factual circumstances. Practical context For Texas businesses (particularly construction-industry defendants and product manufacturers), statutes of repose are among the most favorable defensive doctrines. Best practice: (1) document the repose-triggering event (substantial completion, date of sale) clearly and contemporaneously; (2) calendar repose expiration dates and update litigation reserves accordingly; (3) for contracts of long duration (project-by-project construction), maintain records that establish the substantial-completion date for each project; (4) for products, retain sale records sufficient to establish first-sale dates. For plaintiffs, the practical effect is acute: claims arising from latent defects discovered after 10-15 years are typically extinguished. Affected parties' only recourse may be against ongoing responsible parties (current property owners, current manufacturers of replacement parts) rather than the original wrongdoer. Related Terms Construction Contract · Texas Construction Anti-Indemnity Act · Mechanic's and Materialman's Lien Stock Purchase § A transaction structure in which the buyer acquires the equity (shares of a corporation, membership interests of an LLC, or partnership interests) of the target entity from the target's owners. The target continues as a going concern under new ownership. A stock purchase is a transaction structure in which the buyer acquires the equity (shares of a corporation, membership interests of an LLC, or partnership interests) of the target entity from the target's owners. The target entity continues to exist as a going concern under new ownership; all of the target's assets, liabilities, contracts, and licenses remain with the entity by operation of law. Authority No central TBOC provision governs stock purchases, they are creature-of-contract transactions governed by Texas contract law and the parties' stock purchase agreement. Securities-law considerations under federal law (Securities Act § 4(a)(2) , Regulation D) and Texas Securities Act (Tex. Gov't Code Ch. 4001 et seq.) typically apply. Continuity of liabilities In a stock purchase, the target entity carries forward all of its pre-closing liabilities, known and unknown, contingent and fixed, by operation of law. The buyer's exposure is theoretically capped at its investment in the target (limited liability), but the target's value is reduced by every retained liability. Indemnification provisions in the stock purchase agreement are the primary mechanism for shifting pre-closing liability risk back to the seller. Continuity of contracts and licenses Because the target entity continues to exist, contracts, leases, licenses, and permits typically continue without need for assignment or third-party consent, except where contracts contain specific change-of-control provisions triggered by the equity transfer. Tax treatment A stock purchase generally does not produce a tax basis step-up in the target's assets for the buyer (with limited exceptions under IRC § 338(h)(10) elections for S corporations and certain subsidiary purchases). This contrasts with asset purchases, which generally produce a basis step-up, a meaningful tax difference. Practical context Stock purchases are favored where the target's value is heavily concentrated in assignment-restricted contracts (government contracts, intellectual property licenses, regulatory licenses) and where the seller's tax position favors equity-level capital gains over asset-level ordinary income on certain categories. Companion article: Selling Your Business in Texas Related Terms Asset Purchase · Merger · Reverse Merger · Due Diligence · Representations and Warranties · Indemnification (M&A) Stowers Doctrine § 2024 A Texas common-law doctrine imposing on a liability insurer a duty to settle third-party claims against its insured when settlement would be reasonably prudent. Originating in G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929), the doctrine penalizes insurers that unreasonably refuse settlement offers within policy limits, making them liable for the entire excess judgment if the case results in a judgment exceeding limits. The three-prong Garcia test governs when the duty is triggered. The Stowers Doctrine is a Texas common-law doctrine imposing on a liability insurer a duty to settle third-party claims against its insured when settlement within policy limits would be reasonably prudent. The doctrine penalizes insurers that unreasonably refuse settlement offers within policy limits by making them liable for the entire excess judgment if the case results in a judgment exceeding limits. Stowers is a Texas creation, its principles influence other states (often called "duty to settle" or "duty of good faith") but the specific Texas framework is distinctive. The doctrine emerged in 1929 and has been refined over nearly a century of Texas Supreme Court decisions. Authority Foundational case: G.A. Stowers Furniture Co. v. American Indemnity Co. , 15 S.W.2d 544 (Tex. Comm'n App. 1929, holding approved). Modern three-prong framework: American Physicians Insurance Exchange v. Garcia , 876 S.W.2d 842 (Tex. 1994). Sum-certain demand requirement: Rocor International, Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA , 77 S.W.3d 253 (Tex. 2002). Excess-judgment requirement: Phillips v. Bramlett , 288 S.W.3d 876 (Tex. 2009); In re Farmers Texas County Mut. Ins. Co. , 621 S.W.3d 261 (Tex. 2021). Statutory parallel: Tex. Ins. Code § 541.060(a)(2)(A) (unfair settlement practices). Recent: Golden Bear Insurance Co. v. 34th S&S, LLC , No. CV H-23-1933, 2024 WL 3321508 (S.D. Tex. June 26, 2024) (sum-certain requirement); Westport Insurance Corp. v. Pennsylvania National Mutual Casualty Ins. Co. , 117 F.4th 653 (5th Cir. 2024) (reasonable acceptance period). The three-prong Garcia test Under American Physicians Insurance Exchange v. Garcia (Tex. 1994), an insurer's Stowers duty is triggered when three conditions are met: (1) the claim against the insured is within the scope of coverage ; (2) the demand is within the policy limits ; (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured's potential exposure to an excess judgment . All three prongs must be satisfied; failure of any prong defeats the Stowers claim. The third prong, reasonableness of acceptance, is the most heavily litigated and turns on facts of the underlying case (severity of injury, defendant's liability exposure, available defenses, etc.). Origin, the 1929 case The 1929 G.A. Stowers Furniture case involved a $5,000 auto liability policy. After a delivery truck accident causing serious injuries, the plaintiff offered to settle for $4,000 (within limits). American Indemnity refused. The case went to trial; jury verdict was approximately $14,000, substantially above the $5,000 policy limit. Stowers (the insured) sued American Indemnity for negligent failure to settle. The Texas Supreme Court held that the insurer's control over the litigation under the policy carried a corresponding duty to exercise reasonable care in deciding whether to settle. Failure to exercise that care exposed the insurer to liability for the entire excess judgment. The "sum certain" requirement Rocor International v. National Union (Tex. 2002) established that a Stowers demand must include a sum certain, a specific dollar amount within policy limits. Demands for "all policy limits of any and all insurance contracts" or other ambiguous formulations do not trigger Stowers obligations. Golden Bear v. 34th S&S (S.D. Tex. 2024) recently reaffirmed the sum-certain requirement in the federal court context. The demand must propose: (1) a clear settlement amount; (2) a full release of the insured; (3) a reasonable time to accept (commonly 30 days, though shorter periods can be reasonable depending on circumstances). The excess-judgment requirement Phillips v. Bramlett (Tex. 2009) and In re Farmers (Tex. 2021) establish that a Stowers cause of action requires an actual judgment in excess of policy limits, not merely the risk of an excess judgment. The Stowers claim is for damages resulting from the excess judgment, so without an excess judgment, there are no damages. Within-limits settlements (where the insurer paid policy limits but no excess judgment occurred) do not support Stowers claims even where the insurer's settlement decisions were arguably negligent. The In re Farmers decision particularly clarified this requirement. Reasonable time to accept Stowers demands must allow a reasonable time for the insurer to evaluate and respond. Westport Insurance Corp. v. Pennsylvania National Mutual Casualty Ins. Co. , 117 F.4th 653 (5th Cir. 2024), held that a 45-minute settlement window did not provide reasonable time, defeating the Stowers claim. Allstate Insurance Co. v. Kelly , 680 S.W.2d 595 (Tex. App.-Tyler 1984), found 14 days reasonable. The reasonableness of the deadline is a question of fact; standard practice is 30 days or longer for substantive settlement evaluation. Statutory parallel, § 541.060(a)(2)(A) Section 541.060(a)(2)(A) of the Texas Insurance Code creates a statutory parallel to the Stowers doctrine: it makes it an unfair settlement practice to fail to attempt in good faith to effectuate prompt, fair, and equitable settlement of a claim for which the insurer's liability is reasonably clear. Rocor International (Tex. 2002) recognized that § 541.060(a)(2)(A) imposes essentially the same duty as the common-law Stowers doctrine. Statutory claims under Chapter 541 can carry treble damages and mandatory attorney's fees, providing additional remedies beyond the common-law Stowers framework. Damages and remedies Successful Stowers claim damages include: (1) the entire excess judgment , the difference between the underlying judgment and the policy limits; (2) defense costs , costs incurred by the insured in the underlying suit beyond what the insurer paid; (3) post-judgment interest ; (4) attorney's fees in the Stowers action, recoverable under various theories. Bad-faith claims under § 541.060 can add (5) treble damages for knowing violations; (6) mandatory attorney's fees on the statutory claim. Combined Stowers/§ 541 claims can substantially expand damages. Excess insurer's Stowers rights American Centennial Insurance Co. v. Canal Insurance Co. , 843 S.W.2d 480 (Tex. 1992), established that excess insurers can pursue direct Stowers-type claims against primary insurers. When an excess judgment exhausts primary limits and reaches excess coverage, the excess insurer can sue the primary for negligent failure to settle within primary limits. This creates strong pressure on primary insurers to settle when reasonable demands are made, the excess insurer becomes an active monitor of primary settlement decisions in significant cases. Practical context For Texas commercial parties, the Stowers doctrine is one of the most valuable tools in liability insurance. Best practice for plaintiff's counsel: (1) draft Stowers demands with sum certain, full release, and reasonable acceptance period (typically 30 days); (2) confirm coverage and limits before sending; (3) document the demand and any response carefully; (4) follow up with statutory § 541 demand if insurer fails to engage. Best practice for insureds with excess exposure: (1) press primary insurers to evaluate Stowers demands seriously; (2) document settlement positions; (3) coordinate with excess insurers on material decisions; (4) preserve Stowers rights through the underlying litigation. Best practice for primary insurers: (1) evaluate within-limits demands carefully; (2) document the basis for refusal; (3) consider settlement leverage and litigation risk realistically; (4) coordinate with excess insurer expectations. The Stowers framework has shaped Texas insurance practice for nearly a century; familiarity with its requirements is essential for any insurance-adjacent matter. Related Terms Texas Insurance Code Chapter 541 · Commercial General Liability Insurance · Excess Insurance · Reservation of Rights · Settlement Agreement Subject Matter Jurisdiction § A court's authority to hear a particular type of case. Unlike personal jurisdiction, subject matter jurisdiction cannot be waived, a court without it lacks power to act, and any judgment it enters is void. Federal: 28 U.S.C. § 1331 (federal question), § 1332 (diversity). Subject matter jurisdiction is a court's authority to hear a particular type of case. Unlike personal jurisdiction, subject matter jurisdiction cannot be waived by the parties, a court without subject matter jurisdiction lacks power to act, and any judgment it enters is void. Authority Federal subject matter jurisdiction: 28 U.S.C. § 1331 (federal question); § 1332 (diversity); § 1367 (supplemental). Texas court structure: Tex. Const. art. V ; Tex. Gov't Code Title 2 (court system). Texas Business Court: Tex. Gov't Code Ch. 25A . Federal court subject matter jurisdiction Federal question jurisdiction ( 28 U.S.C. § 1331 ): the case arises under federal law. The "well-pleaded complaint" rule requires the federal question to appear on the face of the plaintiff's complaint, not as an anticipated defense. Diversity jurisdiction ( 28 U.S.C. § 1332 ): complete diversity of citizenship between plaintiffs and defendants, plus an amount in controversy exceeding $75,000. Supplemental jurisdiction ( 28 U.S.C. § 1367 ): federal courts may hear state-law claims that share a common nucleus of operative fact with claims independently within federal jurisdiction. Texas state court subject matter jurisdiction District courts have general jurisdiction over civil matters with no monetary cap, subject to specialized courts (probate, family). County courts have limited jurisdiction with statutory caps. Justice courts handle small claims (currently $20,000 or less). The Texas Business Court has concurrent jurisdiction with district courts for qualifying business disputes meeting the $5 million threshold (post-HB 40). Challenges to subject matter jurisdiction Subject matter jurisdiction may be challenged at any stage of litigation, including for the first time on appeal or by the court sua sponte. Parties cannot stipulate to subject matter jurisdiction that does not exist. Practical context Subject matter jurisdiction analysis precedes substantive analysis in every Texas case. Federal-court litigants must establish jurisdiction in their pleadings; state-court defendants in cases that could have been filed in federal court may consider removal. Related Terms Personal Jurisdiction · Venue · Removal · Texas Business Court Subordination Agreement § A contract under which a creditor agrees to subordinate its claim or lien to that of another creditor, reordering the priority that would otherwise apply by operation of law. Texas UCC § 9.339 expressly authorizes subordination of priority by agreement; bankruptcy enforces subordination under 11 U.S.C. § 510(a). Distinct from intercreditor agreements (broader, comprehensive), though subordination provisions are typically a component of intercreditor agreements. A subordination agreement is a contract under which a creditor agrees to subordinate its claim or lien to that of another creditor, reordering the priority that would otherwise apply by operation of law. Subordination is a foundational tool of commercial finance: it allows borrowers to access additional capital while preserving senior-creditor positions, and it allows creditors to extend additional credit on the strength of a senior position. Authority UCC subordination by agreement: Tex. Bus. & Com. Code § 9.339 ("This chapter does not preclude subordination by agreement by a person entitled to priority"). Bankruptcy enforcement: 11 U.S.C. § 510(a) ("A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable non-bankruptcy law"). Real property lien subordination: governed by general contract law and recordation under Tex. Prop. Code § 13.001 . Federal tax lien subordination: 26 U.S.C. § 6325(d) (IRS may subordinate federal tax lien on application). Lien subordination vs. payment subordination Two principal categories of subordination: (1) lien subordination , the subordinating creditor's lien is junior to the senior creditor's lien on specified collateral; (2) payment subordination , the subordinating creditor agrees not to receive payments while the senior creditor is unpaid (or under specified default conditions). Both can apply to the same creditor relationship; comprehensive intercreditor agreements typically address both. The substantive effects differ: lien subordination affects priority in collateral proceeds; payment subordination affects timing of permitted payments during ordinary loan performance. Two-party vs. three-party agreements Subordination may be implemented by (1) a two-party agreement between the senior and junior creditors; or (2) a three-party agreement including the borrower as a party (typically as a consent, acknowledgment, or covenant). Two-party agreements are sufficient under § 9.339 and § 510(a), the debtor's consent is not required. However, three-party agreements are common because they (a) bind the debtor not to make payments inconsistent with subordination; (b) make the debtor party to the dispute resolution mechanisms; (c) facilitate the debtor's compliance with payment-blockage and similar requirements. Standalone subordinations The simplest subordination is a standalone subordination of one specific debt to another, common in (1) real estate financings, junior mortgage subordinated to senior; (2) intra-family loans subordinated to bank financing; (3) seller financing subordinated to bank acquisition loans; (4) shareholder loans subordinated to senior debt. These are typically short documents addressing only the priority and (sometimes) basic payment-blockage provisions, without the breadth of intercreditor agreements. Comprehensive intercreditor agreements Where subordination is part of a complex multi-creditor structure (senior secured + mezzanine + revolver + second lien), the subordination provisions are typically embedded in a comprehensive intercreditor agreement addressing not only priority but also enforcement standstills, voting in restructurings, DIP financing, plan support, turnover, and many other aspects of the multi-creditor relationship. See Intercreditor Agreement . Bankruptcy enforcement Section 510(a) of the Bankruptcy Code makes subordination agreements enforceable in bankruptcy "to the same extent that such agreement is enforceable under applicable non-bankruptcy law." This means that subordination agreements valid under Texas law generally remain valid in bankruptcy. Distribution priorities in plans of reorganization must respect subordination unless the agreement is itself subject to challenge as fraudulent transfer, equitable subordination, or other bankruptcy-specific doctrines. The "rule of explicitness", requiring clear language for certain provisions like senior-secured-creditor's right to post-petition interest from junior recoveries, has been the subject of litigation but generally is no longer a barrier to enforcement of clear subordination terms. Subordination of federal tax liens Federal tax liens generally take priority based on their assessment and filing dates, not subject to ordinary subordination by private agreement. However, the IRS may issue a subordination certificate under 26 U.S.C. § 6325(d) on application, typically when subordination facilitates collection of the underlying tax (e.g., enabling refinancing that produces cash for tax payment). Federal tax lien subordinations are an important but specialized area requiring application to the IRS. Practical context For Texas commercial lenders, subordination agreements are encountered in (1) routine real estate financings, junior mortgages subordinated to senior; (2) workout situations, junior creditors agreeing to subordinate to fresh financing; (3) seller-financed acquisitions, seller note subordinated to bank acquisition loan; (4) shareholder loans, owner advances subordinated to operating company debt. The principal drafting points: (a) which obligations are subordinated and which are excluded; (b) what events trigger payment blockage; (c) standstill duration on enforcement; (d) carve-outs for ordinary payments during compliance. For borrowers, subordination provisions typically cap the operational flexibility of the subordinated obligation, payments to the subordinated creditor become contingent on senior compliance, which can affect cash management and family-loan dynamics. Related Terms Intercreditor Agreement · Priority · Perfection · Security Interest · Mezzanine Financing Subrogation § An equitable doctrine and contractual right under which an insurer that has paid an insured's claim assumes the insured's rights against responsible third parties. After payment, the insurer can pursue the third party for reimbursement to the extent of the payment. Common in property, auto, and workers' compensation contexts. Many commercial contracts include "waiver of subrogation" provisions in which the insured (or its insurer) waives subrogation rights against contractual counterparties, coordinating with insurance to allocate risk between the contracting parties. Subrogation is an equitable doctrine and contractual right under which an insurer that has paid an insured's claim assumes the insured's rights against responsible third parties. After payment, the insurer "stands in the shoes" of the insured and can pursue the third party for reimbursement to the extent of the payment made. Subrogation prevents double recovery (insured collecting from both insurer and tortfeasor) while ensuring the ultimate financial burden falls on the responsible party. Common in property insurance (insurer pays building damage, then sues the contractor whose negligence caused it), auto, workers' compensation, and increasingly cyber. Authority Foundational Texas equitable subrogation: Frymire Engineering Co. v. Jomar International, Ltd. , 259 S.W.3d 140 (Tex. 2008); Argonaut Insurance Co. v. Allstate Insurance Co. , 869 S.W.2d 537 (Tex. App.-Corpus Christi 1993, writ denied). Workers' compensation subrogation: Tex. Lab. Code §§ 417.001-417.003 . Health insurance subrogation: contract-based with state-law overlay. Made-whole doctrine: Fortis Benefits v. Cantu , 234 S.W.3d 642 (Tex. 2007) (general anti-subrogation rule). Waiver of subrogation enforceability: Trinity Universal Ins. Co. v. Bill Cox Const., Inc. , 75 S.W.3d 6 (Tex. App.-San Antonio 2001, no pet.); construction industry waivers under standard AIA forms. The subrogation principle Subrogation arises in two principal forms: (1) contractual subrogation , most insurance policies include a subrogation provision granting the insurer subrogation rights upon payment; (2) equitable subrogation , equitable doctrine independent of contract, applying where one party pays a debt or claim that should ultimately be borne by another. The principle: the insurer pays the insured's loss, then steps into the insured's position to pursue the responsible third party. Recovery from the third party reimburses the insurer (preventing the insured from double recovery) while ensuring the responsible party bears the ultimate cost. Common subrogation contexts Recurring subrogation scenarios: (1) property damage , property insurer pays the insured for fire damage, then sues the contractor whose work caused the fire; (2) auto accidents , auto insurer pays its insured's collision claim, then pursues the at-fault driver; (3) workers' compensation , workers' comp carrier pays employee's medical and wage benefits, then sues the third party responsible for the workplace injury; (4) health insurance , health insurer pays medical bills, then pursues the tortfeasor whose negligence caused the injury (subject to made-whole and other limitations); (5) cyber insurance , increasingly common; cyber insurer pays for ransomware response, then pursues the hacker (often unsuccessfully) or vendor whose security failures contributed; (6) products liability , insurer pays under product policy, then pursues component manufacturer. Workers' compensation subrogation Texas workers' compensation subrogation has specific statutory framework: (1) § 417.001 creates the workers' comp subrogation right against responsible third parties; (2) § 417.002 specifies the carrier's recovery, typically the amount of benefits paid; (3) § 417.003 addresses third-party suit settlement and apportionment; (4) the carrier has a "first dollar" recovery right, recovers benefits paid before the injured worker recovers any tort damages (with statutory exceptions and apportionment provisions). The framework gives workers' comp carriers powerful recovery rights but also coordinates with the injured worker's recovery for damages beyond benefits. Made-whole doctrine The "made-whole" doctrine is a general equitable principle that an insurer cannot pursue subrogation until the insured has been fully made whole for its loss. The principle protects insureds against scenarios where partial recovery would be allocated to the insurer's reimbursement before the insured's uncompensated loss. Fortis Benefits v. Cantu , 234 S.W.3d 642 (Tex. 2007), addressed the made-whole doctrine in Texas. Application varies: contract-based subrogation may override made-whole if the contract is clear; equitable subrogation typically follows made-whole. ERISA preemption can affect made-whole application in self-funded health plans. Waiver of subrogation Many commercial contracts include "waiver of subrogation" provisions in which the parties (and their insurers) waive subrogation rights against contractual counterparties. Common in: (1) construction contracts , AIA standard forms include mutual waivers; (2) commercial leases , landlord and tenant waive against each other; (3) service agreements , vendor and customer waive against each other; (4) joint ventures , JV partners waive against each other. The principle: when both parties carry insurance for the same risk, allowing subrogation creates inefficient circular litigation; better to allocate the risk to one party's insurance and forgo subrogation. Waivers are generally enforceable in Texas as part of the parties' risk allocation. Key drafting: waiver must be conspicuous and clear; insurer's consent is typically deemed effective by policy language. Insurance policy waiver-of-subrogation provisions Commercial property and liability policies typically include language addressing waiver of subrogation: (1) pre-loss waiver , insured can waive subrogation in writing before the loss without affecting coverage; (2) post-loss waiver , typically void; insured cannot waive after loss because the right has vested in the insurer; (3) contractual waivers , recognized when made before the loss; (4) specific endorsements , some policies require specific endorsement to recognize waivers (CG 24 04 in CGL). Best practice in commercial contracting: (a) include waiver of subrogation in the contract; (b) confirm both parties' insurance recognizes the waiver; (c) coordinate with additional insured and other risk-allocation provisions. Common defenses to subrogation Defenses commonly raised against subrogation claims: (1) waiver , contractual waiver bars the claim; (2) made-whole , insured not yet made whole; (3) statute of limitations , limitations runs from the original injury, not the insurer's payment; (4> release , insured's release of the third party may bind the insurer; (5) no underlying liability , the third party is not liable for the loss; (6) sole negligence of insured , third party not at fault; (7) insured's contractual indemnification of third party , if the insured agreed to indemnify the third party, subrogation may be barred. Practical context For Texas commercial parties, subrogation arises in two primary contexts: (1) understanding insurer subrogation rights when collecting on insurance claims; (2) waiving subrogation in commercial contracts to allocate risk efficiently. Best practice for contracting parties: (1) include mutual waiver of subrogation in commercial contracts where both parties carry insurance; (2) ensure waivers are conspicuous, clearly stated, and specifically waive subrogation against contracting parties; (3) confirm insurance carrier recognition of waiver (insurance certificate or specific endorsement); (4) coordinate with additional insured and indemnification provisions for comprehensive risk allocation. Best practice for insureds: (1) understand insurer subrogation rights upon claim payment; (2) preserve documentation of underlying tortfeasor identity and liability; (3) coordinate with insurer on settlement decisions affecting subrogation; (4) for workers' comp, understand the carrier's first-dollar recovery rights. Common gap: contracts include indemnification but not waiver of subrogation, leaving the insurer to subrogate against the indemnifier, defeating the parties' risk allocation. Related Terms Additional Insured · Commercial General Liability Insurance · Indemnification (Contractual) · Construction Contract · Workers' Compensation Subscription Agreement § A contract between an issuer and an investor in a private securities offering, documenting the investor's commitment to purchase securities and providing investor representations regarding accredited status, sophistication, suitability, and other matters relevant to securities exemption compliance. Standard component of private offerings alongside PPM. Includes investor questionnaire, representations, signature pages, and payment instructions. A Subscription Agreement is a contract between an issuer and an investor in a private securities offering. The agreement documents the investor's commitment to purchase securities and provides investor representations regarding accredited status, sophistication, suitability, and other matters relevant to securities exemption compliance. Subscription agreements are foundational to private placement compliance, they document the issuer's basis for relying on Reg D or other exemptions and provide defensive documentation against subsequent investor claims. Authority Securities law context: subscription agreements support compliance with Reg D Rule 506 verification and disclosure requirements. 17 C.F.R. § 230.502 (general conditions); 17 C.F.R. § 230.506 (Rule 506 specific requirements). State law: governed by general contract law of governing jurisdiction; enforceability of arbitration provisions per FAA; representations support common-law fraud and Rule 10b-5 defenses. Standard subscription agreement components Comprehensive subscription agreements typically include: (1) recitals , describing the offering and parties; (2) commitment to purchase , investor agrees to purchase specified amount of securities at stated price; (3) investor representations , extensive representations supporting exemption compliance; (4) investor questionnaire , accredited investor verification, sophistication, investment experience; (5) conditions to closing ; (6) delivery and payment mechanics ; (7) indemnification , investor indemnifies issuer for breach of representations; (8) governing law and dispute resolution ; (9) signature pages and notarization . Investor representations Standard investor representations include: (1) accredited investor status , specific category claimed (income, net worth, professional certification, etc.); (2) investment experience , sophistication and ability to evaluate investment; (3) investment intent , purchase for own account, not for distribution; (4) residence , state of residence (relevant for state-law compliance); (5) access to information , opportunity to ask questions and obtain additional information; (6) review of disclosure , receipt and review of PPM, financial statements, etc.; (7) independent investment decision , relied on own analysis, not issuer representations beyond the disclosure documents; (8) risks understood , investor understands and accepts investment risks; (9) no public solicitation (for Rule 506(b)), investor not solicited through public communications; (10) OFAC compliance , not a sanctioned person. Investor questionnaire The investor questionnaire is typically attached to or integrated with the subscription agreement: (1) accredited investor checkbox , investor selects qualifying category; (2) net worth/income certification ; (3) investment experience ; (4) employment and finance background ; (5) investment objectives ; (6) tax status ; (7) OFAC and AML certifications ; (8) other suitability information . The questionnaire creates contemporaneous documentation of investor qualification, critical for SEC and TSSB defense. Verification documentation (Rule 506(c)) For Rule 506(c) general solicitation offerings, subscription agreements typically include or reference verification documentation: (1) income verification , tax returns, W-2s, K-1s; (2) net worth verification , bank statements, brokerage statements, real estate appraisals, credit reports; (3) third-party verification , letters from CPA, attorney, broker-dealer, RIA. The subscription agreement typically requires investor to deliver verification or authorize third-party verification before closing. Many issuers use third-party verification services to streamline the process. Indemnification Subscription agreements typically include investor indemnification of issuer for: (1) breach of investor representations , particularly accredited status and investment intent; (2) misrepresentation in questionnaire ; (3) resale violations , investor reselling in violation of securities laws. The indemnification protects issuer if investor's representations turn out to be false (e.g., investor was not accredited despite certification), preserving exemption while shifting cost to non-compliant investor. Closing mechanics Subscription agreements typically provide for: (1) conditional acceptance , issuer reserves right to accept or reject subscription; (2) delivery of funds , wire transfer or escrow procedure; (3) delivery of securities , typically electronic delivery or paper certificates; (4) execution of additional documents , joinder to investor agreements, voting agreements, ROFR/co-sale agreements as applicable. Many private offerings have specific closing procedures (rolling closes, milestone closes, drag-along on initial close). Common drafting issues Recurring issues: (1) vague accredited investor representations , should require specific category claimed; (2) missing investment intent representations , important for Rule 144 holding period analysis; (3) missing residence and OFAC certifications , important for state-law and AML compliance; (4) weak indemnification , should cover breaches by investor; (5) governing law issues , typically state of issuer's incorporation or state with broader rights; (6) arbitration provisions , increasingly common; subject to FAA enforcement; (7) integration with side letters , sophisticated investors often negotiate side letters with additional terms. Practical context For Texas issuers, subscription agreement preparation is essential. Best practice: (1) coordinate subscription agreement with PPM and investor questionnaire as integrated package; (2) obtain specific accredited investor category claim, not just general certification; (3) for Rule 506(c), require verification documentation as condition to closing; (4) include comprehensive investor indemnification; (5) maintain executed copies for compliance file, typically 6-year minimum retention; (6) coordinate with cap table and securities issuance documentation. For investors: (1) review representations carefully, accuracy is critical to enforceability; (2) understand indemnification scope; (3) preserve copy of executed subscription package; (4) verify accuracy of accredited investor category at signing and any subsequent investments. Common pitfall: issuers using template subscription agreements without customizing for specific offering, generic representations fail to address offering-specific issues. Related Terms Regulation D · Accredited Investor · Private Placement Memorandum · Form D · Texas Securities Act Summary Judgment § A procedure by which a court resolves a case (or specific claims) without trial, on grounds that there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law. Texas TRCP 166a provides two distinct procedures, traditional and no-evidence, with materially different burdens. Summary judgment is a procedure by which a court resolves a case (or specific claims) without trial, on grounds that there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law. Texas Rule of Civil Procedure 166a provides two distinct summary-judgment procedures, traditional and no-evidence, with materially different burdens of proof. Authority Tex. R. Civ. P. 166a (summary judgment); 166a(c) (traditional); 166a(i) (no-evidence, adopted 1997). Leading cases: Casso v. Brand , 776 S.W.2d 551 (Tex. 1989); King Ranch, Inc. v. Chapman , 118 S.W.3d 742 (Tex. 2003); Sudan v. Sudan , 199 S.W.3d 291 (Tex. 2006). Federal: Fed. R. Civ. P. 56 ; Celotex Corp. v. Catrett , 477 U.S. 317 (1986); Anderson v. Liberty Lobby , 477 U.S. 242 (1986). Traditional summary judgment (TRCP 166a(c)) The movant must produce evidence establishing that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. The movant carries the entire burden, must conclusively negate the opponent's claim, conclusively establish all elements of an affirmative defense, or otherwise prove entitlement to judgment. No-evidence summary judgment (TRCP 166a(i)) Adopted in 1997, the no-evidence procedure permits a movant to shift the burden by asserting that there is no evidence of one or more essential elements of the non-movant's claim. The non-movant must then come forward with specific evidence raising a genuine issue of material fact on each challenged element. Failure to do so requires summary judgment for the movant. The no-evidence motion may be filed only after adequate time for discovery has elapsed. The motion must specifically state which elements are challenged, it cannot simply assert "no evidence" generically. Standard of review Evidence is reviewed in the light most favorable to the non-movant; all reasonable inferences are drawn in favor of the non-movant. Credibility determinations and weighing of conflicting evidence are not appropriate at summary judgment, those are jury functions. Hybrid motions Movants frequently combine traditional and no-evidence grounds in a single motion, addressing different elements through different procedures. Courts typically address no-evidence grounds first because they are most procedurally favorable to movants. Federal summary judgment Federal Rule 56 has a single procedure, substantively similar to Texas traditional summary judgment but procedurally streamlined. The Celotex trilogy of 1986 cases established federal summary judgment as a meaningful pretrial disposition mechanism, not the disfavored mechanism of earlier eras. Practical context Summary judgment is the principal pretrial dispositive mechanism in Texas commercial litigation. The no-evidence procedure has shifted Texas practice substantially since 1997, it puts genuine pressure on plaintiffs to develop evidence supporting each element of their claims during discovery. Sophisticated defense practice involves early identification of weak elements and timely no-evidence challenges. Related Terms Discovery · Motion to Dismiss · Petition / Complaint · Answer Supersedeas Bond § A bond posted by a judgment debtor to suspend (supersede) execution of the judgment during the pendency of appeal. Texas supersedeas is governed by Tex. R. App. P. 24 and Tex. Civ. Prac. & Rem. Code § 52.006. The bond amount typically equals the judgment plus interest and costs, capped under § 52.006 at the lesser of (a) 50% of the judgment debtor's net worth or (b) $25 million. Constitutional and statutory net-worth caps protect against confiscatory bonds. A supersedeas bond is a bond posted by a judgment debtor to suspend (supersede) execution of the judgment during the pendency of appeal. Without supersedeas, the judgment creditor can execute on the judgment immediately upon entry, garnishing accounts, foreclosing on assets, conducting turnover sales, even if appeal is pending. The supersedeas bond is the price of staying execution during appeal. Texas supersedeas practice is governed by Tex. R. App. P. 24 and Tex. Civ. Prac. & Rem. Code § 52.006, with statutory net-worth caps protecting against confiscatory bond requirements. Authority Texas supersedeas framework: Tex. R. App. P. 24 (suspension of enforcement of judgment); Tex. Civ. Prac. & Rem. Code § 52.006 (statutory net-worth cap and form of security). Constitutional foundation: Tex. Const. art. I, § 13 (open courts; limits on confiscatory appeal bonds); In re Smith , 192 S.W.3d 564 (Tex. 2006) (constitutional analysis of supersedeas requirements). Calculation: Rule 24.2(a)(1) (judgment plus 1 year of post-judgment interest plus costs). Reduction motions: Rule 24.2(b) ; § 52.006(c) . Federal counterpart: Fed. R. App. P. 8 ; Fed. R. Civ. P. 62 . Standard supersedeas amount Rule 24.2(a)(1) sets the standard supersedeas amount at the sum of: (1) the amount of compensatory damages awarded; (2) interest for the estimated duration of the appeal (statutorily set at 1 year of post-judgment interest); and (3) costs awarded. Punitive damages are excluded from the calculation. The bond may be in the form of cash deposit, surety bond, letter of credit, or alternative security approved by the court. Most commercial supersedeas is by surety bond, substantially less expensive than cash deposit. Statutory net-worth cap, § 52.006 Section 52.006 imposes a critical cap on supersedeas amounts: the bond may not exceed the lesser of (a) 50% of the judgment debtor's current net worth or (b) $25 million. This statutory cap protects against confiscatory bond requirements that would prevent appeals by judgment debtors with limited net worth. The judgment debtor must affirmatively invoke the cap by motion supported by financial evidence; the trial court determines current net worth. The judgment creditor may challenge the net-worth determination, sometimes leading to evidentiary hearings on debtor financial condition. Reduction motions The judgment debtor may seek further reduction of the supersedeas bond by motion under Rule 24.2(b). The trial court may reduce the amount upon a showing that posting the standard amount would cause "substantial economic harm." Substantial economic harm typically means inability to operate the business, loss of going-concern value, or other irreversible consequences disproportionate to the protection of the judgment creditor. The trial court has discretion to set alternative security, collateral with a value supporting the judgment, ongoing payment commitments, or cash deposits in lower amounts. Trial court vs. appellate court jurisdiction Supersedeas determinations are typically made initially by the trial court, with the trial court retaining limited jurisdiction over supersedeas issues during the pendency of appeal. The appellate court has authority to modify supersedeas requirements on motion under Rule 24.4. The trial court's determination of net worth is typically final unless clearly erroneous; reduction motions and modifications are reviewed for abuse of discretion. Effect of supersedeas Once supersedeas is posted in proper form and amount, the judgment creditor cannot execute on the judgment during the pendency of appeal, no garnishment, no turnover, no foreclosure. Post-judgment interest continues to accrue at the rate determined under Tex. Fin. Code Ch. 304. If the judgment is affirmed on appeal, the bond is paid to the judgment creditor (up to the bond amount) on the affirmance becoming final. If the judgment is reversed, the bond is released. Partial reversals or modifications result in pro rata satisfactions. Strategic considerations Supersedeas is a critical strategic decision in post-judgment posture: (1) cost-benefit analysis , surety bond premiums (typically 1-2% of bond amount per year) plus collateral requirements vs. risk of execution during appeal; (2) likelihood of reversal , supersedeas makes most sense when the judgment debtor has substantial appellate prospects; (3) asset protection , supersedeas prevents the judgment creditor from reaching assets during appeal, even if the debtor ultimately loses; (4) settlement leverage , debtors who can post supersedeas often negotiate from stronger positions than those who cannot. Inability to post supersedeas can effectively force settlement on terms unfavorable to the judgment debtor. Practical context For Texas judgment debtors contemplating appeal, the supersedeas calculation is the threshold financial decision. Best practice: (1) obtain net-worth analysis from financial professionals before judgment to enable rapid bond determination; (2) maintain banking relationships with surety markets, having a surety lined up enables prompt bond posting; (3) consider letter-of-credit alternatives if surety is unavailable or expensive; (4) prepare net-worth-cap motion contemporaneously with notice of appeal; (5) for closely-held businesses, careful pre-judgment net-worth structuring (consistent with not committing fraud) can reduce ultimate supersedeas requirements. For judgment creditors, contesting net-worth determinations and challenging form-of-security alternatives is an important post-judgment strategic activity, pressure on supersedeas often produces settlement opportunities. Related Terms Post-Judgment Interest · Interlocutory Appeal · Mandamus · Garnishment · Turnover Order T Tag-Along / Drag-Along Rights § Two complementary rights in stockholder agreements: (1) Tag-Along Rights protect minority stockholders by allowing them to participate in ("tag along") sales by majority on same terms; (2) Drag-Along Rights protect majority by allowing them to compel minority to sell ("drag along") in qualifying transactions. Standard provisions in venture-backed company stockholder agreements and PE-portfolio company governance. Together they manage minority and majority interests in liquidity events. Tag-Along and Drag-Along Rights are two complementary provisions in stockholder agreements that manage minority and majority stockholder interests in liquidity events. Tag-Along Rights protect minority stockholders by allowing them to participate in ("tag along") sales by majority on the same terms. Drag-Along Rights protect majority by allowing them to compel minority to sell ("drag along") in qualifying transactions. Together these rights are foundational to venture-backed company stockholder agreements and PE-portfolio company governance, addressing the central tension between majority control and minority protection in exits. Authority State law: governed by general contract and corporate law of state of incorporation. Texas: Tex. Bus. Orgs. Code §§ 21.211-21.225 (transfer restrictions and rights of shareholders). Standard documents: NVCA model investor rights agreement, voting agreement, and right of first refusal/co-sale agreement (incorporating tag-along and drag-along framework). Tag-Along Rights Tag-Along Rights, also called Co-Sale Rights, protect minority stockholders by allowing participation in majority sales: (1) triggering event , proposed sale by majority stockholder(s) to third party; (2) notice to minority of proposed sale terms; (3) election period , typically 15-30 days; (4) tag election , minority can sell pro rata portion of holdings on same terms; (5) third-party closing , majority cannot complete sale unless minority's tag rights satisfied. Tag rights ensure minority cannot be left behind if majority exits, preserving exit liquidity for all stockholders. Drag-Along Rights Drag-Along Rights protect majority by compelling minority to sell in qualifying transactions: (1) triggering event , majority approval of sale (typically requires specified threshold, often majority of preferred plus board approval); (2) compelled sale , minority must sell at same terms; (3) conditions , typically minimum sale price, full release of minority, indemnification limits, no non-compete obligations; (4) same terms , economic terms identical to majority's; (5) fiduciary considerations , directors approving must satisfy fiduciary duties. Drag rights are critical for sale negotiation, buyer wants 100% acquisition; without drag, minority can hold up sale. Common structures Tag-along and drag-along provisions are typically in: (1) Right of First Refusal/Co-Sale Agreement , combined ROFR + tag-along; (2) Voting Agreement , drag-along provisions; (3) Stockholders Agreement , comprehensive document with all transfer rights; (4) Investor Rights Agreement , tag-along provisions in some structures. NVCA model documents bundle these provisions in standard packages, serving as market-standard templates. Typical drag-along thresholds Standard drag-along trigger thresholds: (1) majority of preferred approval; (2) majority of common approval (sometimes); (3) board approval ; (4) combined preferred + common majority in some structures; (5) specific class consents for protected matters. Higher thresholds give minority more protection; lower thresholds give majority more flexibility. Sophisticated structures balance based on specific deal dynamics. Drag-along protections for minority Minority stockholders typically negotiate protections in drag-along provisions: (1) same form of consideration , cash, stock, etc.; (2) minimum sale price ; (3) maximum indemnification exposure , typically pro rata, with caps; (4) no non-compete obligations on dragged minority; (5) no extended employment commitments ; (6) representations and warranties limits , typically only own ownership and authority; (7) process requirements , adequate notice, opportunity for representation. Without protections, drag-along can compel minority to accept unfavorable terms. Preferred stockholder dynamics For preferred stockholders, tag-along and drag-along interact with liquidation preferences: (1) tag with preferred preferences , tag-along sale realizes liquidation preference; (2) drag of preferred , typically requires preferred consent threshold; (3> conversion at sale , preferred typically receives greater of liquidation preference or as-converted common amount. Sophisticated preferred negotiations include drag-along thresholds requiring preferred consent for sales below specific multiples of original investment. Common drafting issues Recurring drafting issues: (1) covered transactions , direct sale, merger, recapitalization; (2) excluded transactions , family transfers, estate planning; (3) "same terms" precision , economic equivalent vs. literal same; (4) indemnification scope and pro rata ; (5) fundamental representations , typically full liability; (6) escrow / holdback treatment ; (7) change of control of upstream entities ; (8) specific performance availability . Practical context For Texas venture-backed companies and PE portfolio companies, tag-along and drag-along provisions are standard. Best practice for sellers (founders, common holders): (1) negotiate drag-along thresholds carefully, higher thresholds protect against premature drag; (2) include minority protections, minimum price, pro rata indemnification, no non-compete; (3) coordinate with founder employment and equity vesting; (4) understand drag-along practical implications. For investors: (1) standardize provisions through NVCA templates; (2) ensure drag-along thresholds support exit flexibility; (3) tag-along protects pro rata participation. For minority investors: (1) ensure tag-along covers all material sales; (2) negotiate drag-along protections; (3) coordinate with preferred preferences. Common pitfall: drag-along provisions allowing majority to compel minority into unfavorable terms (extensive indemnification, non-competes, restrictive covenants), minority should negotiate explicit limits. Companion article: Selling Your Business Related Terms Right of First Refusal · Buy-Sell Agreement · Preferred Stock · Shareholder · Term Sheet Tax Distribution Provision § An operating agreement or partnership agreement clause requiring the entity to distribute cash to owners in amounts sufficient to cover their estimated tax liability on allocated income. The principal structural remedy for phantom income, taxable income allocated without corresponding cash distribution. Calculated at an assumed tax rate applied to each owner's K-1 allocated income. A tax distribution provision is a clause in an operating agreement, partnership agreement, or LLC company agreement requiring the entity to distribute cash to owners in amounts sufficient to cover their estimated federal and state income tax liability on allocated income. Tax distributions are the principal structural remedy for phantom income, taxable income allocated to pass-through owners that exceeds cash distributed. Without a tax-distribution provision, owners can find themselves owing material tax with no cash from the entity to pay it. Authority Texas LLC operating agreements: Tex. Bus. Orgs. Code § 101.052 (operating agreement governs); § 101.054 (matters that may not be waived). Texas partnership agreements: Tex. Bus. Orgs. Code Ch. 152 . Federal allocation framework: 26 U.S.C. §§ 702-704 (partnership allocations); § 1366 (S-corp pro rata allocations). Tax distributions interact with the federal estimated-tax framework under 26 U.S.C. § 6654 . Mechanics A typical tax-distribution provision specifies: (1) an "Assumed Tax Rate", usually the highest applicable federal individual rate plus the highest applicable state rate (often 40%-45%); (2) the calculation base, usually each member's allocated taxable income net of allocated losses; (3) timing, typically quarterly distributions sized to cover the federal estimated-tax due dates (April 15, June 15, September 15, January 15); (4) interaction with regular distributions, tax distributions are usually treated as advances against future regular distributions to maintain pro rata treatment; (5) safe-harbor adjustments at year-end based on actual K-1 figures. Mandatory vs. discretionary Two principal drafting approaches: (1) mandatory , the entity MUST distribute the calculated amount unless prohibited by law or financing covenants; (2) discretionary , the manager or board MAY make tax distributions in their reasonable judgment. Mandatory provisions favor minority owners (who might otherwise be squeezed by majority refusing distributions); discretionary provisions favor the entity's flexibility. The typical compromise: mandatory subject to enumerated exceptions for solvency, financing covenants, and reserves for foreseeable obligations. Pro rata vs. allocated-income basis Tax distributions raise a structural question: should they be made (a) pro rata in proportion to ownership, or (b) in proportion to each owner's allocated K-1 income? When allocations track ownership (typical case), the two approaches converge. In partnerships and LLCs with special allocations (preferred returns, waterfall structures), the two approaches diverge significantly. Sophisticated agreements address this by tying tax distributions to allocated income and treating them as advances to be reconciled in subsequent waterfall distributions. Interaction with debt covenants Tax-distribution provisions frequently conflict with debt-covenant restrictions on distributions. Lenders typically permit "permitted tax distributions" up to a calculated amount, but the definitions matter, some agreements limit tax distributions to actual tax owed (requiring K-1 reconciliation), while others permit estimated-rate distributions. Mismatch between operating agreement requirements and debt-covenant permissions is a recurring negotiation point in financing transactions. Common drafting errors Frequent issues: (1) failure to address state and local taxes in the assumed rate; (2) ambiguity over whether tax distributions are gross-up or net of credits; (3) no provision for true-up against actual K-1 amounts; (4) no exception for solvency or financing-covenant restrictions; (5) failure to address former owners (who may still receive K-1s for partial-year allocations); (6) no provision for tax distributions in years of loss-allocation followed by gain (where prior-year losses sheltered current-year tax obligations). Practical context For Texas LLCs, the tax-distribution provision should be included in every operating agreement covering pass-through entities with multiple owners. The cost of including a well-drafted provision at formation is small; the cost of disputes over discretionary distributions during a profitable year, particularly with minority owners, is significant. The provision should be revisited when (1) entity adds new owners; (2) entity changes tax classification; (3) entity takes on debt with distribution covenants; (4) state-tax exposure changes (multistate operations). Companion article: Business Divorces in Texas Related Terms Phantom Income · Distribution · Schedule K-1 · Pass-Through Entity · Company Agreement · Estimated Tax Payments Tenant Estoppel Certificate § A signed statement by a tenant confirming key terms of a lease, rent amount, term, security deposit, lease modifications, claimed defaults, and other material facts, for the benefit of a prospective lender, purchaser, or other third party. Used in commercial property acquisitions and refinancings to confirm the lease cash flow underlying the transaction. The tenant is "estopped" from later disputing the facts certified. A tenant estoppel certificate (sometimes simply "estoppel" or "estoppel letter") is a signed statement by a tenant confirming key terms of its commercial lease, rent amount, lease term, security deposit, lease modifications, claimed landlord defaults, and other material facts, for the benefit of a prospective lender or purchaser of the leased property. The tenant is legally "estopped" from later disputing the facts certified, providing the third-party recipient with reliable confirmation of the lease cash flow underlying the transaction. Authority Tenant estoppel certificates derive enforceability from common-law equitable estoppel principles supplemented by lease provisions. Most modern commercial leases include an "estoppel obligation" clause requiring the tenant to deliver a signed estoppel within a stated number of days of landlord request. Subordination, Non-Disturbance, and Attornment Agreements (SNDAs) frequently incorporate or accompany estoppels. Statute of frauds: Tex. Bus. & Com. Code § 26.01 (lease modifications must be in writing). When estoppels are required Estoppels are typically required at (1) property sale , purchaser requires estoppels from material tenants confirming lease terms before closing; (2) refinancing , lender requires estoppels confirming the rent stream supporting the loan; (3) recapitalization , equity investors verifying the underlying tenancy; (4) lease assignment by landlord , assignee verifying obligations being assumed; (5) certain tenant disputes , establishing the parties' positions at a fixed point in time. Standard contents A typical tenant estoppel certifies: (1) the lease, including all amendments and addenda, identified by date and document; (2) lease term, commencement, expiration, options to extend; (3) current monthly base rent and the date through which paid; (4) operating expense pass-through structure and current escalations; (5) security deposit amount and form; (6) tenant's possession of the premises and rent commencement; (7) landlord and tenant defaults claimed (or none); (8) tenant offsets, abatements, or claims (or none); (9) prepayments beyond current month (or none); (10) consent to assignment of the lease (where applicable). Negotiation points Common tenant resistance points: (1) scope of certifications , tenants typically resist certifications about future obligations or matters outside their direct knowledge; (2) "to tenant's knowledge" qualifiers , tenants prefer knowledge qualifiers on representations about landlord performance; (3) delivery deadline , tenants resist short deadlines (5-10 day windows are common; tenants often request 15-30 days); (4) liability for incorrect statements , tenants resist absolute liability for any inaccuracy. Landlords typically push for broad certifications, short deadlines, and absolute liability, which is why estoppels are heavily negotiated in lease drafting (the obligation is established years before the certificate is needed). Failure to deliver If a tenant refuses or fails to deliver a requested estoppel, lease provisions typically deem the tenant to have certified that (1) the lease is in full force and effect; (2) no defaults exist; and (3) all rent has been paid through the current period. This "deemed estoppel" provides the landlord with workable substitute for the actual document. However, deemed estoppels rely on contractual provisions; absent such provision in the lease, the landlord must obtain the estoppel through other means (subpoena, declaratory action) which delays closing. SNDA interaction Tenant estoppels are frequently delivered concurrently with Subordination, Non-Disturbance, and Attornment Agreements (SNDAs), separate documents in which the tenant agrees that (1) its lease is subordinate to a specified mortgage; (2) the lender will not disturb tenant's possession on foreclosure if tenant is not in default ("non-disturbance"); and (3) tenant will recognize lender or successor as landlord post-foreclosure ("attornment"). Estoppels and SNDAs together form the standard tenant-cooperation package required at most commercial closings. Practical context For Texas commercial property buyers, tenant estoppels are typically a closing condition for material tenants (often defined as the top 10-15 leases or those with rent above a threshold). A buyer should (1) provide the form estoppel to seller well before closing for distribution to tenants; (2) follow up directly with tenants if seller is not driving the process; (3) review returned estoppels carefully for material discrepancies from the rent roll; (4) be prepared to negotiate around missing or modified estoppels (price adjustment, indemnity, holdback). For tenants asked to deliver estoppels, the document warrants careful review, modifications to "match the rent roll" should be resisted if they are inaccurate. Related Terms Commercial Lease · Commercial Real Estate Purchase Agreement · Title Insurance · Due Diligence Term Sheet § A non-binding (with limited binding provisions) preliminary agreement outlining the principal economic and governance terms of a proposed financing or transaction. Term sheets in VC financings typically include valuation, investment amount, security type, liquidation preference, anti-dilution, voting and protective provisions, board composition, and key closing conditions. While generally non-binding as to deal completion, term sheets typically have binding exclusivity, confidentiality, and expense provisions. A Term Sheet is a non-binding (with limited binding provisions) preliminary agreement outlining the principal economic and governance terms of a proposed financing or transaction. Term sheets are foundational to deal-making practice, they capture the parties' agreement on key terms before substantial diligence and definitive documentation. In venture capital and growth equity, term sheets typically include valuation, investment amount, security type, liquidation preference, anti-dilution, voting and protective provisions, board composition, and key closing conditions. Authority Generally not statutorily defined; term sheets are governed by general contract law of governing jurisdiction. Texas case law on enforceability of preliminary agreements: America's Favorite Chicken Co. v. Cajun Enterprises, Inc. , 130 F.3d 180 (5th Cir. 1997). Standard templates: NVCA Model Term Sheet (Series A); various YC, AngelList, and other templates for early-stage rounds. Foundational case on preliminary agreement enforceability: Texaco, Inc. v. Pennzoil Co. , 729 S.W.2d 768 (Tex. App.-Houston 1987, writ ref'd n.r.e.) (verbal agreement to merge). Standard term sheet components Comprehensive VC term sheets typically include: (1) economic terms , investment amount, pre-money valuation, security type (typically Series Preferred); (2) liquidation preference ; (3) dividend preference ; (4) anti-dilution ; (5) voting rights ; (6) protective provisions ; (7) board composition , investor designees, independent directors; (8) information rights ; (9) registration rights ; (10) pro rata rights ; (11) right of first refusal/co-sale ; (12) drag-along ; (13) founder vesting ; (14) option pool , pre-money or post-money expansion; (15) conditions to closing ; (16) no-shop / exclusivity ; (17) expenses ; (18) confidentiality . Binding vs. non-binding provisions Term sheets typically distinguish: (1) non-binding provisions , economic and governance terms; subject to definitive documentation; either party can walk away; (2) binding provisions , typically: (a) exclusivity / no-shop , issuer cannot solicit competing offers for stated period (typically 30-60 days); (b) confidentiality , terms and discussions remain confidential; (c) expenses , who bears legal/diligence costs; (d) governing law ; (e) termination . Clear identification of which provisions are binding vs. non-binding is critical to avoid disputes. The pre-money valuation negotiation Pre-money valuation is typically the most negotiated term sheet item. Calculation: (1) pre-money valuation + investment amount = post-money valuation; (2) investor ownership = investment / post-money. Example: $5M investment at $20M pre-money = 20% ownership ($25M post-money). Sophisticated terms: (a) option pool inclusion , pre-money or post-money, substantially affects effective valuation; (b) SAFE/note conversion , typically converts at lower of cap or financing price, affecting cap table; (c) full diluted vs. issued shares for valuation purposes. Option pool (the "shuffle") Option pool sizing and timing is heavily negotiated: (1) pre-money option pool , pool created before investment dilutes existing stockholders only; investor-favorable; (2) post-money option pool , pool created after investment dilutes both existing stockholders and new investor; founder-favorable; (3) top-up , adding shares to existing pool to reach target percentage; analytical framework matters substantially. Typical pool sizes: 10-20% of fully-diluted post-money. Pool sizing affects effective valuation, a larger pre-money pool means lower effective valuation for founders. The drag-along right Drag-along rights compel common stockholders to participate in sale of company approved by specified threshold of preferred holders (and sometimes board). Standard provisions: (1) triggering threshold , typically majority of preferred or board+majority preferred approval; (2) terms , same terms as the dragged-along holders, with appropriate adjustments for liquidation preference; (3) limitations , minimum sale price, cap on liability for representations, indemnification limits. Drag-along provides liquidity by ensuring all stockholders participate in qualifying sales. Exclusivity / no-shop Exclusivity provisions prevent issuer from soliciting or accepting competing offers during stated period: (1) scope , what discussions are prohibited; (2) duration , typically 30-60 days; (3) termination , automatic at expiration unless extended; (4) limitations , typically permits responding to unsolicited offers with notice. Exclusivity is critical for investors investing in diligence and legal costs; without exclusivity, issuers might use term sheets to generate competing offers. Standard provision in venture term sheets. Term sheet timeline Standard term sheet to closing timeline: (1) term sheet execution , week 0; (2) diligence and documentation , weeks 1-6; (3) definitive agreement signing , week 6-8; (4) closing , typically simultaneous with signing or shortly thereafter. Total timeline: typically 6-10 weeks from term sheet to closing for typical Series A. Compressed timelines (3-4 weeks) are increasingly common in competitive deals; longer timelines (3-6 months) for complex situations. Letter of intent vs. term sheet "Term sheet" is the standard term for VC and growth equity preliminary agreements; "Letter of Intent" (LOI) is the parallel term for M&A. Functional differences are minimal, both are preliminary agreements with similar binding/non-binding structure. M&A LOIs may emphasize structure (asset vs. stock purchase), purchase price mechanism (cash, stock, earn-out), and indemnification framework. See Letter of Intent . Practical context For Texas startups, term sheet negotiation is among the highest-leverage activities in the financing process. Best practice: (1) use NVCA model term sheet as starting point for Series A and later; (2) understand each provision's practical implications, not just legal terms; (3) negotiate option pool sizing carefully, pre-money inclusion substantially reduces effective valuation; (4) understand binding vs. non-binding distinction, sign with awareness of binding obligations; (5) calendar exclusivity period; (6) coordinate term sheet with anticipated definitive agreements; (7) engage experienced VC counsel for material rounds. For investors: (1) standardize term sheet templates for portfolio efficiency; (2) calibrate terms to deal stage and competitive dynamics; (3) prioritize deal-critical terms over marginal ones; (4) build relationships through reasonable term negotiation. Common pitfall: founders signing term sheets without modeling cap table impact under various scenarios, discovering at closing that liquidation preferences and option pool dilution substantially reduce founder economics. Modeling is essential before signature. Related Terms Preferred Stock · Letter of Intent · SAFE · Convertible Note · Representations and Warranties Texas Arbitration Act § Codified at Tex. Civ. Prac. & Rem. Code Ch. 171, the Texas General Arbitration Act (TGAA) governs arbitration agreements involving intrastate commerce in Texas, those that fall outside the FAA's interstate-commerce reach. Procedurally similar to the FAA but with a different statutory framework. The TGAA is the default state-law backstop where the FAA does not apply; in interstate-commerce cases, the FAA preempts inconsistent TGAA provisions. The Texas Arbitration Act (TGAA), codified at Tex. Civ. Prac. & Rem. Code Ch. 171 , is Texas's state-law arbitration framework governing arbitration agreements that fall outside the FAA's interstate-commerce reach. The TGAA tracks the Federal Arbitration Act framework procedurally, addressing agreement enforceability, motions to compel, motions to stay, confirmation, and vacatur, but operates as a state-law backstop. Most commercial arbitration in Texas is governed by the FAA because of the broad interpretation of "involving commerce"; the TGAA applies primarily to purely intrastate transactions and certain specifically excluded categories. Authority Texas General Arbitration Act: Tex. Civ. Prac. & Rem. Code Ch. 171 : § 171.001 (validity of arbitration agreement); § 171.021 (motion to compel arbitration); § 171.022 (stay of court proceedings); § 171.023 (motion to compel arbitration in pending suit); § 171.041 (initiation of arbitration); § 171.087 (confirmation of arbitration award); § 171.088 (vacatur grounds); § 171.090 (modification of award); § 171.098 (appeal). Federal preemption framework: Southland Corp. v. Keating , 465 U.S. 1 (1984); AT&T Mobility LLC v. Concepcion , 563 U.S. 333 (2011). Texas Supreme Court application: In re Service Corp. Int'l , 85 S.W.3d 171 (Tex. 2002); In re Olshan Found. Repair Co. , 328 S.W.3d 883 (Tex. 2010). Scope, when the TGAA applies The TGAA applies to arbitration agreements that fall outside the Federal Arbitration Act's reach. Two principal scenarios: (1) intrastate transactions , both parties Texas residents, performance entirely within Texas, no out-of-state connections that would invoke "interstate commerce" under the FAA's broad definition; (2) FAA-excluded categories , the FAA excludes certain categories of workers (seamen, railroad employees, transportation workers under New Prime Inc. v. Oliveira , 586 U.S. 105 (2019)). Where neither party invokes the FAA and the contract is silent on governing law, courts may apply the TGAA. In practice, most commercial arbitration in Texas is FAA-governed because of the broad "involving commerce" interpretation. Section 171.001, agreement validity Section 171.001 makes arbitration agreements "valid and enforceable", a state-law equivalent to FAA § 2. The provision applies to written agreements to arbitrate disputes between the contracting parties. The TGAA permits the same general contract defenses to enforcement (fraud, duress, unconscionability) as the FAA, applied without arbitration-specific bias. Enforcement proceedings parallel federal procedures: motion to compel arbitration with stay of court proceedings, with the arbitration agreement's validity determined by the court (gateway issue) before the arbitrator addresses the merits. Procedural mechanics TGAA enforcement procedures: (1) Motion to Compel , § 171.021; party moves to compel arbitration in any court with jurisdiction; (2) Stay of Litigation , § 171.025 stays trial on issues subject to arbitration; (3) Initiation , § 171.041 governs how arbitration is commenced; (4) Conduct , §§ 171.041-171.060 address arbitration procedure (witnesses, subpoenas, depositions in limited circumstances); (5) Award , § 171.053 addresses the award form; (6) Confirmation , § 171.087 makes awards judicially enforceable; (7) Vacatur , § 171.088 lists grounds (corruption, partiality, exceeded powers, no proper notice); (8) Appeal , § 171.098 governs appellate review. FAA-TGAA interaction Where both the FAA and TGAA potentially apply, the FAA controls and preempts inconsistent TGAA provisions. Practical implications: (1) most commercial arbitration is FAA-governed; (2) sophisticated arbitration clauses often expressly invoke FAA governance; (3) where the contract is silent on governing law, FAA applicability is determined by the interstate-commerce nexus; (4) the TGAA serves as a backup framework in genuinely intrastate arbitration. For most practitioners, FAA familiarity is essential; TGAA familiarity is useful for the residual cases where the FAA does not apply. Vacatur grounds Section 171.088 lists TGAA vacatur grounds, paralleling FAA § 10: (1) award procured by corruption, fraud, or other undue means; (2) evident partiality or corruption of arbitrator; (3) arbitrator misconduct refusing to postpone hearing on showing of sufficient cause, refusing to hear evidence material to the controversy, or other misbehavior prejudicing rights of party; (4) arbitrator exceeded powers or rendered an indefinite, mootness or otherwise improper award. The Texas Supreme Court has rejected "manifest disregard" as a separate ground (paralleling federal doctrine). Vacatur is rare; most awards are confirmed. Appellate review Section 171.098 authorizes interlocutory appeal from orders: (1) denying a motion to compel arbitration; (2) granting a motion to stay arbitration; (3) confirming or denying confirmation; (4) modifying or correcting; (5) vacating without directing rehearing. Other arbitration-related orders are appealable only after final judgment in the underlying litigation. The interlocutory appeal pathway distinguishes TGAA practice from some other state arbitration regimes; orders denying compelled arbitration can be reviewed promptly rather than waiting for trial. Practical context For Texas commercial parties, TGAA familiarity matters in narrow but important contexts. Best practice: (1) for most commercial contracts, draft arbitration clauses to expressly invoke FAA governance, broader pro-arbitration policy and clearer preemption analysis; (2) for genuinely intrastate transactions where parties prefer the TGAA, draft clearly to that effect; (3) be aware of FAA-excluded categories (transportation workers per New Prime ) where the TGAA may be the only available framework; (4) for procedural disputes, recognize that TGAA procedures track FAA procedures closely but with state-law specifics; (5) for vacatur and confirmation proceedings, distinguish state-court forum (TGAA framework) from federal-court forum (FAA framework), choice of forum can be material. The TGAA is rarely the primary framework but is foundational for the cases it governs. Related Terms Arbitration · FAA Preemption · Choice of Law · Mandamus · Interlocutory Appeal Texas Business Court § 2025 A specialized statewide trial court created in 2023 to hear complex commercial disputes involving corporate governance, fiduciary duties, derivative actions, securities law, and qualified transactions. Began accepting cases September 1, 2024. Appeals go exclusively to the Fifteenth Court of Appeals. The Texas Business Court is a specialized statewide trial court created in 2023 to hear complex commercial disputes involving corporate governance, fiduciary duties, derivative actions, securities law, and qualified transactions. It began accepting cases on September 1, 2024. Appeals go exclusively to the Fifteenth Court of Appeals. Authority Tex. Gov't Code Chapter 25A (Business Court); §§ 22.220, 22.201(p) (Fifteenth Court of Appeals); Tex. R. Civ. P. 352–359. Originating legislation: Acts 2023, 88th Leg., R.S., Ch. 380 (HB 19), eff. Sept. 1, 2023. Structure The Business Court is organized into 11 geographical divisions corresponding to Texas's Administrative Judicial Regions. Five divisions began operation on September 1, 2024 (Dallas, Austin, San Antonio, Fort Worth, Houston). Under HB 40 (eff. Sept. 1, 2025), the Texas Legislature authorized activation of the remaining six divisions. Each division is staffed by judges appointed by the governor. Subject-matter jurisdiction Tex. Gov't Code § 25A.004 grants concurrent jurisdiction with district courts over specified categories of cases. As amended by HB 40 effective September 1, 2025, the principal categories are actions exceeding $5 million involving derivative proceedings, corporate governance disputes, securities law claims, claims between an organization and its current or former owners or officers, breach of fiduciary duty by directors or officers, veil-piercing actions, claims arising under the TBOC, qualified transactions, intellectual property, and trade-secret matters. For publicly traded companies, no amount-in-controversy threshold applies. The HB 40 threshold reduction Before September 1, 2025, the principal jurisdictional thresholds were $10 million. HB 40 reduced these to $5 million, substantially expanding the court's reach. Removal and transfer A case filed in district court that falls within the Business Court's jurisdiction may be removed by any party within 30 days of discovering jurisdictional facts, by agreement, or at the originating court's request. Tex. Gov't Code § 25A.006 . Procedure The Business Court applies the Texas Rules of Civil Procedure with supplemental rules in Tex. R. Civ. P. 352–359. Right to jury trial is preserved (in contrast to Delaware's Chancery Court). Filing fees are $2,500 versus $350 in district court. Tex. R. Civ. P. 360 requires a written opinion on dispositive rulings upon any party's request, producing a developing body of published Business Court opinions. Forum-selection clauses Texas corporations may now mandate the Business Court as the exclusive venue for internal governance claims through certificate of formation or bylaw provisions. Tex. Bus. Orgs. Code § 2.115 (as amended by SB 29, eff. May 14, 2025). Practical context The Business Court is the most consequential institutional development in Texas corporate practice in a generation. Combined with SB 29's codified business judgment rule and HB 40's expanded jurisdiction, it positions Texas as a serious forum-of-choice competitor to Delaware. Texas-based businesses with potential exposure above $5 million should expect increased Business Court litigation. Related Terms Director · Corporation · Fiduciary Duty · Derivative Action · Business Judgment Rule Texas Business Organizations Code § 2025 The unified Texas statute that governs the formation, governance, internal operations, and termination of Texas business entities including for-profit corporations, LLCs, partnerships, and other domestic filing entities. Often abbreviated "TBOC." The Texas Business Organizations Code (often abbreviated "TBOC") is the unified Texas statute that governs the formation, governance, internal operations, and termination of Texas business entities. Codified at Tex. Bus. Orgs. Code §§ 1.001 et seq., it supplanted the predecessor Texas business statutes (the Texas Business Corporation Act, the Texas Limited Liability Company Act, the Texas Revised Limited Partnership Act, the Texas Revised Partnership Act, and others) effective January 1, 2010, when its mandatory application phase concluded. Authority Tex. Bus. Orgs. Code §§ 1.001 et seq. (effective January 1, 2006, with mandatory application beginning January 1, 2010). Acts 2003, 78th Leg., R.S., Ch. 182 (the Hastings Act). Structure The TBOC is organized into eight titles: Title 1. General provisions applicable to all entities, §§ 1.001–12.355 . Includes definitions, formation, name reservation, registered agents, foreign-entity registration, mergers and conversions, dispositions of property, fundamental business transactions, and winding up. Title 2. Corporations, §§ 21.001–22.515 . Chapter 21 governs for-profit corporations; Chapter 22 governs nonprofit corporations. Title 3. Limited liability companies, §§ 101.001–101.622 . Title 4. Partnerships (general partnerships, limited partnerships, limited liability partnerships), §§ 151.001–154.402 . Title 5. Real estate investment trusts, §§ 200.001–200.564 . Title 6. Associations (cooperatives, professional associations), §§ 251.001–252.018 . Title 7. Professional entities, §§ 301.001–304.003 . Title 8. Miscellaneous and transition provisions, §§ 401.001–402.014 . Hub-and-spoke design The TBOC was designed on a "hub-and-spoke" model: Title 1 contains general provisions applicable to all entities (the "hub"), and Titles 2 through 8 contain entity-specific provisions (the "spokes"). When working with a TBOC question, the answer is typically found in the entity-specific title first, supplemented by the general provisions of Title 1. The Texas Bar Foundation publishes an annotated version that organizes provisions by entity type. Definitions The TBOC contains a substantial general-definitions section at § 1.002 , supplemented by entity-specific definitions in each title's lead chapter (e.g., § 21.002 for corporations, § 101.001 for LLCs). Practitioners should consult both the general and entity-specific definitions when interpreting a TBOC term. Recent amendments The TBOC has been amended in significant respects at every legislative session since enactment. Notable recent amendments include: (1) 2021 (eff. Sept. 1, 2021): Indemnification flexibility expanded to permit restrictions in any "governing document" ( § 8.003 ); LLC-distribution insolvency test refined to permit GAAP/IFRS-based asset valuation ( § 101.206 ). (2) 2022 (eff. June 1, 2022): Series LLC framework expanded to authorize "registered series" with separate Texas Secretary of State filings ( §§ 101.621–101.622 ); LLC filing-instrument signature requirements tightened to require authorized officer, manager, or member ( § 101.0515 ). (3) 2023 (eff. Sept. 1, 2024): Texas Business Court created by HB 19 (Tex. Gov't Code Ch. 25A); related TBOC and Texas Government Code amendments. (4) 2025 (eff. May 14, 2025): SB 29 enacted the most significant Texas corporate-governance amendments in a generation. New § 21.419 (codified business judgment rule for publicly-traded and opt-in corporations); amendments to § 21.218 (narrowed books-and-records inspection rights, including new (b-1) excluding emails/texts/social media unless those communications effectuate corporate action, and new (b-2) authorizing denial of demands made in connection with anticipated derivative proceedings); new § 21.552(a)(3) (3% derivative-action ownership threshold for publicly-traded and opt-in corporations); new § 21.561(c) (no attorney's fees for disclosure-only derivative settlements); amended § 2.115 (exclusive forum and venue clauses in governing documents); new § 2.116 (jury-waiver clauses in governing documents); amended § 101.401 (LLC fiduciary-duty elimination through company agreement); new § 152.002(e) (extending limited-partnership fiduciary-duty elimination authority). (5) 2025 (eff. Sept. 1, 2025): HB 40 reduced the Business Court's amount-in-controversy threshold from $10 million to $5 million for most categories of cases. Practical context The TBOC is now in its 16th year of operation as the unified Texas business-entity statute. Its hub-and-spoke design and contractual-flexibility orientation make Texas one of the most user-friendly U.S. business-entity codes. The 2024–2025 amendments, combined with the Texas Business Court's operationalization in September 2024, have repositioned Texas as a serious competitor to Delaware as a state of corporate domicile for the first time in modern history. Practitioners should expect continued amendment activity as the Texas Business Court generates published opinions and as the Legislature responds to the comparative analysis between Texas and Delaware corporate-governance regimes. Mark the date of every TBOC citation: provisions that read accurately in 2024 may have been substantially amended in 2025. Related Terms Corporation · Limited Liability Company · Director · Shareholder · Member · Texas Business Court · Business Judgment Rule Texas Commission on Human Rights Act (TCHRA) § Texas's principal employment discrimination statute, codified at Tex. Lab. Code Chapter 21. Prohibits discrimination in employment based on race, color, sex, national origin, religion, age, and disability. Generally tracks Title VII, ADA, and ADEA frameworks but with Texas-specific procedural elements. Administered by the Texas Workforce Commission Civil Rights Division (TWC-CRD); requires administrative exhaustion before suit. Filing deadline: 180 days. Damages caps parallel federal Civil Rights Act of 1991. The Texas Commission on Human Rights Act (TCHRA), codified as Chapter 21 of the Texas Labor Code, is Texas's principal employment discrimination statute. The TCHRA prohibits discrimination in employment based on race, color, sex, national origin, religion, age (40+), and disability. The statute generally tracks Title VII, ADA, and ADEA frameworks but contains Texas-specific procedural and substantive elements. Administration was transferred from the Texas Commission on Human Rights to the Texas Workforce Commission Civil Rights Division (TWC-CRD) in 2004. Authority Texas statute: Tex. Lab. Code Ch. 21 . Key provisions: § 21.051 (unlawful employment practices); § 21.055 (retaliation); § 21.105 (administrative procedures); § 21.201 (filing complaint); § 21.252 (right-to-sue letter); § 21.254 (private cause of action); § 21.2585 (damages and caps). Administrative agency: Texas Workforce Commission Civil Rights Division (TWC-CRD). Foundational case: NME Hospitals, Inc. v. Rennels , 994 S.W.2d 142 (Tex. 1999) (TCHRA standards generally track federal). Federal counterpart: Title VII, ADA, ADEA. Coverage and protected classes TCHRA applies to employers with 15 or more employees (matching Title VII; broader than ADEA's 20-employee threshold). Protected classes under § 21.051: race; color; sex (including pregnancy, childbirth, related conditions per § 21.106; following Bostock at the federal level); national origin; religion; age (40 and older); disability. The 15-employee threshold extends TCHRA protection to mid-market Texas employers not covered by federal ADEA. Relationship to federal law TCHRA generally tracks federal employment discrimination law: (1) elements , substantially similar to Title VII, ADA, ADEA; (2) burden-shifting framework , McDonnell Douglas analysis applied to TCHRA claims; (3) damages caps , TCHRA has its own structure mirroring federal Civil Rights Act of 1991 caps; (4) administrative exhaustion , required for TCHRA claims through TWC-CRD, parallel to EEOC for federal claims. Texas Supreme Court in NME Hospitals confirmed TCHRA standards generally follow federal precedent, but with Texas-specific differences in some procedural and damages provisions. Administrative exhaustion TCHRA claims require administrative exhaustion through TWC-CRD: (1) charge filing within 180 days; (2) TWC-CRD investigation , typically 6-12 months; (3) conciliation if reasonable cause found; (4) right-to-sue letter issued; (5) state-court suit within 60 days of right-to-sue letter (if filed before 2 years from charge filing) or within 2 years from charge filing. The 60-day post-letter and 2-year-from-charge deadlines are both jurisdictional; missing either typically bars the TCHRA claim. Damages and remedies TCHRA damages structure (§ 21.2585): (1) compensatory damages for emotional distress; (2) punitive damages for malicious or reckless violations; (3) back pay and benefits ; (4) front pay or reinstatement ; (5) injunctive relief ; (6) attorney's fees and costs . Damages caps under § 21.2585 vary by employer size: $50K (15-100 employees), $100K (101-200), $200K (201-500), $300K (500+), mirroring CRA 1991 caps for federal claims. The caps apply to combined compensatory and punitive damages; back pay, front pay, and equitable relief are not subject to caps. The TWC-CRD work-share with EEOC TWC-CRD and EEOC operate under a work-share agreement: charges filed with either agency are typically deemed filed with both. This provides several advantages: (1) extended deadline , TCHRA filing deadline is 180 days; coordination with EEOC extends federal Title VII deadline to 300 days in Texas; (2) dual investigation ; (3) reduced administrative burden . TCHRA charges must be filed within 180 days; the deadline is strictly applied. Coordination with federal claims Plaintiffs frequently file dual TCHRA and federal Title VII (or ADA, ADEA) claims. Coordination considerations: (1) different deadlines , TCHRA 180/60-day vs. Title VII 300/90-day; (2) different jurisdictions , TCHRA can be filed in state or federal court; Title VII typically federal court; (3) different elements , generally similar but with Texas-specific variations; (4) strategic considerations , state-court venue may be preferable in some cases. Sophisticated employment plaintiffs frequently dual-file to preserve options. Practical context For Texas employers, TCHRA compliance parallels federal law but with Texas-specific procedural requirements. Best practice: (1) maintain compliant policies covering all TCHRA-protected classes; (2) train managers on TCHRA standards; (3) respond to TWC-CRD charges promptly; (4) coordinate state and federal claim defenses where dual-filed; (5) for severance agreements with employees 40+, comply with both OWBPA (federal) and TCHRA waiver requirements; (6) maintain HR documentation supporting business reasons. For employees: (1) calendar 180-day TCHRA deadline strictly; (2) consider dual-filing; (3) preserve evidence of discriminatory comments and patterns; (4) calendar 60-day post-letter and 2-year-from-charge deadlines for state-court suit. Common pitfall: plaintiffs missing the 60-day post-letter deadline for TCHRA suit while preserving the 90-day federal deadline, losing state-law claims and damages cap advantages. Companion article: Before Firing an Employee Related Terms Title VII · Age Discrimination in Employment Act · Americans with Disabilities Act · EEOC Charge · Texas Workforce Commission Texas Construction Anti-Indemnity Act § Subchapter C of Chapter 151 of the Texas Insurance Code, effective January 1, 2012, voiding broad-form indemnity provisions in construction contracts that purport to indemnify a party for its own fault. Also voids related additional-insured insurance procurement to the same extent. Cannot be waived. Limited residential and employee-injury exceptions apply. The Texas Construction Anti-Indemnity Act (TCAIA) is Subchapter C of Chapter 151 of the Texas Insurance Code, effective January 1, 2012. It voids broad-form indemnity provisions in construction contracts that purport to indemnify the indemnitee for its own fault, even shared or contributory fault, and renders unenforceable related additional-insured insurance procurement provisions to the same extent. The Act cannot be waived. It applies prospectively to construction contracts entered into on or after January 1, 2012. Authority Texas Insurance Code, Ch. 151, Subchapter C: Tex. Ins. Code §§ 151.101-151.105 . Key provisions: § 151.101 (applicability); § 151.102 (indemnity restrictions); § 151.103 (employee injury exception); § 151.104 (unenforceable additional insurance provision); § 151.105 (other exceptions, including municipal public works). Definitions: § 151.001 . Texas Supreme Court interpretation: Signature Industrial Services, LLC v. International Paper Co. , No. 20-0396, 2022 WL 128546 (Tex. Jan. 14, 2022) (pleadings-stage analysis applies). Underlying common-law indemnity framework: Ethyl Corp. v. Daniel Construction Co. , 725 S.W.2d 705 (Tex. 1987) (fair notice doctrine, now subordinate to TCAIA). The core prohibition Section 151.102 voids any provision in a construction contract that purports to require an indemnitor to indemnify, hold harmless, or defend an indemnitee against a claim caused by the indemnitee's negligence, fault, or breach of contract. The prohibition is absolute, it cannot be circumvented by careful drafting (express references to negligence and conspicuous language under Ethyl Corp. ). Unlike the common-law fair-notice doctrine, TCAIA renders the offending indemnity provision void, not merely unenforceable. Scope, broad definition of construction contract The TCAIA's reach is intentionally broad. "Construction contract" includes contracts to "construct, alter, remodel, repair, demolish, or maintain" improvements to real property other than single-family homes, townhouses, duplexes, or land development directly related thereto ( § 151.001(5) ). The definition has been applied to crane leases, equipment rental agreements with installation services, and other arrangements that parties reasonably believed had little to do with "construction." Master service agreements between facility owners and service providers often fall within the Act's scope without the parties realizing it. Additional-insured procurement also void Section 151.104 extends the prohibition to additional-insured insurance procurement. A contract provision requiring the indemnitor to procure additional-insured coverage protecting the indemnitee against the indemnitee's own fault is void to the same extent as the underlying indemnity provision. This eliminates the most common workaround that pre-2012 Texas construction contracts used, extracting through additional-insured policies what could not be extracted through indemnity. Specific exception: consolidated insurance programs (CIPs) under Subchapter A may carry additional-insured terms otherwise prohibited. Employee injury exception Section 151.103 provides a critical exception: the prohibition does NOT apply to claims for the bodily injury or death of the indemnitor's employee, agent, or subcontractor of any tier. This means indemnity provisions covering injuries to the indemnitor's own workforce remain enforceable, including for the indemnitee's own negligence. The exception is the subject of substantial case law, including Maxim Crane Works, L.P. v. Zurich American Ins. Co. , 642 S.W.3d 551 (Tex. 2022), addressing scope of the exception. Other exceptions Section 151.105 provides additional exceptions, including: (1) public works contracts with municipalities; (2) workers' compensation benefits; (3) copyright infringement claims; (4) certain rail-related contracts; (5) claims arising from pre-existing environmental conditions; (6) liens for failure to pay subcontractors. These narrow exceptions do not materially limit the Act's broad application to typical commercial construction. Drafting after TCAIA Compliant indemnity provisions in post-2012 Texas construction contracts must be limited to the indemnitor's own fault and the fault of those for whom it is responsible (employees, agents, subcontractors). Common compliant patterns: "to the extent caused by the negligence or willful misconduct of Contractor, its employees, agents, or subcontractors." Pre-2012 form contracts must be revised before use; AIA and ConsensusDocs forms have been updated to reflect TCAIA but require Texas-specific verification. Practical context For Texas owners, contractors, subcontractors, and their insurers, TCAIA fundamentally reshaped indemnity practice. The Act has been on the books since 2012, but compliance gaps persist, particularly in master service agreements and equipment-rental arrangements that the parties did not consider "construction contracts." The cost of TCAIA-noncompliant indemnity is permanent: the offending provision is void, and the indemnitee has no fallback. Texas counsel reviewing or drafting any contract that touches buildings, structures, or real property should perform a TCAIA scope analysis. Related Terms Construction Contract · Indemnification (Corporate) · Mechanic's and Materialman's Lien · Texas Prompt Payment Act · Master Service Agreement Texas Data Privacy and Security Act § 2026 Texas's comprehensive consumer data privacy law, effective July 1, 2024 (with universal opt-out provisions effective January 1, 2025). Imposes transparency, purpose-limitation, security, and consumer-rights obligations on controllers processing the personal data of Texas residents. Enforced exclusively by the Texas Attorney General; no private right of action. The Texas Data Privacy and Security Act (TDPSA) is Texas's comprehensive consumer data privacy law. Signed by Governor Abbott on June 18, 2023, it took effect July 1, 2024, with universal opt-out (Global Privacy Control) provisions taking effect January 1, 2025. The TDPSA imposes transparency, purpose-limitation, security, and consumer-rights obligations on businesses that process the personal data of Texas residents. Authority Texas Data Privacy and Security Act, Tex. Bus. & Com. Code Ch. 541 (originally enacted as HB 4 (2023)): § 541.051 (controller obligations and limitations on processing); § 541.052 (consumer rights); § 541.054 (data protection assessments); § 541.101 (controller-processor contracts and DPA requirements); § 541.151 - .155 (enforcement). Texas Responsible Artificial Intelligence Governance Act (TRAIGA), effective January 1, 2026, amending TDPSA processor obligations. Companion statute: Texas Identity Theft Enforcement and Protection Act, Tex. Bus. & Com. Code Ch. 521 , governing breach notification. Applicability The TDPSA applies to any person who (1) conducts business in Texas or produces products or services consumed by Texas residents; (2) processes or engages in the sale of personal data; and (3) is not a small business as defined by the U.S. Small Business Administration. Notably, the TDPSA contains no revenue threshold and no minimum-consumer-count threshold, distinguishing it from California, Colorado, and most other state privacy laws. Small businesses are exempt from most obligations except the requirement to obtain consumer consent before selling sensitive data. Controller obligations A controller, the entity determining the purpose and means of processing personal data, must (1) limit personal data collection to what is reasonably necessary for the disclosed purpose; (2) provide a clear privacy notice describing categories of data, purposes, sharing practices, and consumer rights; (3) obtain explicit opt-in consent before processing sensitive data (precise geolocation, health, biometrics, race, religion, sexual orientation, immigration status, children's data); (4) honor consumer-rights requests within 45 days; and (5) maintain reasonable administrative, technical, and physical security measures. Consumer rights Texas residents acting in an individual or household context (excluding employment and commercial contexts) have rights to (1) know whether their data is being processed; (2) access the data; (3) correct inaccurate data; (4) delete data; (5) obtain a portable copy; and (6) opt out of (a) sale of personal data, (b) targeted advertising, and (c) profiling that produces legal or similarly significant effects. Since January 1, 2025, controllers must honor universal opt-out signals such as Global Privacy Control transmitted via the consumer's browser. Enforcement The Texas Attorney General has exclusive enforcement authority. The AG must provide written notice of a violation and a 30-day cure period before initiating an enforcement action. Civil penalties may reach $7,500 per violation; treble damages are available for willful violations. The TDPSA does not provide a private right of action, consumers cannot sue businesses directly under the statute. The Attorney General has been actively investigating major technology platforms for TDPSA compliance since enforcement began. Practical context Texas businesses operating any consumer-facing website or app should treat TDPSA compliance as table stakes. Minimum compliance posture: (1) update the privacy notice to TDPSA standards; (2) implement a consumer-rights request intake process; (3) execute DPAs with all processors handling personal data; (4) deploy a Global Privacy Control honor mechanism on all customer-facing properties; (5) conduct data protection assessments for sensitive-data processing and targeted advertising; and (6) ensure incident-response procedures meet both TDPSA security obligations and Chapter 521 breach-notification requirements. Companion article: Data Breach Response: The First 72 Hours Related Terms SaaS Agreement · Master Service Agreement · Confidentiality Agreement · Trade Secret · Generative AI Output Texas Franchise Tax § 2026 A privilege tax imposed by Texas on most taxable entities formed in or doing business in the state. Calculated as a percentage of taxable margin under Tex. Tax Code Ch. 171, the lowest of four computation methods. The 2026 no-tax-due threshold is $2.65 million in annualized total revenue. Standard rate 0.75% (0.375% for retail/wholesale); EZ Computation rate 0.331%. Reports due May 15. The Texas Franchise Tax is a privilege tax imposed by the State of Texas on most taxable entities formed in or doing business in the state. Despite its name, the tax has nothing to do with franchising, it is a margin-based tax administered by the Texas Comptroller of Public Accounts. Texas does not impose a state corporate or personal income tax; the franchise tax is the principal entity-level state tax replacing the income tax in those structures. Annual reports are due May 15. Authority Statute: Tex. Tax Code Ch. 171 (Franchise Tax). Key provisions: § 171.001 (tax imposed); § 171.002 (rates); § 171.0003 (passive entity); § 171.101 (taxable margin computation); § 171.106 (apportionment); § 171.0005 (qualified new veteran-owned business). Implementing rules: 34 Tex. Admin. Code § 3.581 et seq.; Rule 3.586 (doing business in Texas); Rule 3.587 (total revenue, amended effective March 1, 2026); Rule 3.590 (combined reporting). Wayfair-based nexus: 34 Tex. Admin. Code § 3.586 . Who pays Subject entities include corporations (including S-corporations), LLCs (including single-member LLCs), limited partnerships and limited liability partnerships, professional associations, business trusts, and certain financial institutions. Out-of-state entities with nexus in Texas, including economic nexus over $500,000 in Texas gross receipts, are also subject. NOT subject: sole proprietorships (other than single-member LLCs); general partnerships owned entirely by natural persons; certain passive entities; entities exempt under Subchapter B of Ch. 171 ; qualified new veteran-owned businesses for the first five years. Margin calculation, four methods, lowest wins Taxable margin under § 171.101 is the lowest of: (1) 70% of total revenue; (2) total revenue minus cost of goods sold; (3) total revenue minus compensation (capped at $480,000 per person for 2026 reports); or (4) total revenue minus $1 million. The chosen method is then apportioned to Texas using single-factor gross-receipts apportionment under § 171.106 (Texas gross receipts ÷ gross receipts everywhere). Rates and thresholds (2026) Standard rate: 0.75% of apportioned taxable margin. Retail or wholesale entities: 0.375% (must derive 50%+ of revenue from retail or wholesale activities). EZ Computation rate: 0.331% (available to entities with annualized total revenue ≤ $20 million; foregoes deductions and most credits). 2026 no-tax-due threshold: $2.65 million in annualized total revenue (up from $2.47M in 2024-2025). Entities at or below the threshold owe no franchise tax but must still file an information report (PIR or OIR). Reporting obligations Entities above the threshold file the Long Form (Forms 05-158-A and 05-158-B) or the EZ Computation (Form 05-169). All entities (except passive entities and qualified veteran-owned businesses) must annually file either a Public Information Report (Form 05-102, corporations, LLCs, LPs, professional associations, financial institutions) or an Ownership Information Report (Form 05-167, other entities). Entities at or below the no-tax-due threshold no longer file a No Tax Due Report (effective for 2024+ reports) but must file the information report. Reports due May 15; six-month extension available with Form 05-164 plus required payment of 90% of current-year or 100% of prior-year tax. Forfeiture and reinstatement Failure to file or pay franchise tax results in forfeiture of the entity's right to transact business in Texas under § 171.251 . Forfeited entities lose access to Texas courts as plaintiffs and may face personal liability for officers and directors who incurred debts during the forfeiture period. Reinstatement requires filing all delinquent reports, paying all tax due plus penalties and interest, and filing a tax clearance request, a process that frequently takes 4-8 weeks even after all filings are current. Practical context For most Texas SMBs operating below the $2.65M threshold, the franchise tax obligation is administrative rather than substantive, file the information report, owe nothing. The pitfall is treating filing as optional. Forfeiture for non-filing is automatic and creates significant downstream complications. Best practice: calendar May 15 annually, run all four margin computations even when below threshold to confirm classification, and never let an entity drift into delinquent status. Annual filing fees are minimal compared to reinstatement costs and litigation-standing problems caused by forfeiture. Related Terms Corporation · Limited Liability Company · Texas Sales and Use Tax · Certificate of Formation · Registered Agent · Foreign Entity Texas Insurance Code Chapter 541 § Texas Insurance Code Chapter 541 (formerly Article 21.21) prohibits unfair methods of competition and unfair or deceptive acts or practices in the business of insurance, including unfair settlement practices. Section 541.060 lists specific prohibited acts (failing to settle when liability is reasonably clear, misrepresenting material facts, failing to provide reasonable explanations). Section 541.151 creates a private cause of action with damages including actual damages, treble damages for knowing violations, and mandatory attorney's fees. Texas Insurance Code Chapter 541 (formerly codified as Article 21.21 of the Insurance Code) prohibits unfair methods of competition and unfair or deceptive acts or practices in the business of insurance. The chapter's most heavily litigated provisions address unfair settlement practices, Section 541.060 lists specific prohibited acts that, when committed in handling claims, expose the insurer to private liability under Section 541.151. Chapter 541 is the principal statutory framework for "bad faith" insurance claims in Texas, paralleling the common-law Stowers doctrine but with broader scope and statutory remedies including treble damages. Authority Texas Insurance Code Chapter 541: Tex. Ins. Code §§ 541.001-541.402 . Key provisions: § 541.051 (unfair methods of competition); § 541.060 (unfair settlement practices, the most important provision); § 541.061 (misrepresentations); § 541.151 (private cause of action); § 541.152 (damages, including treble); § 541.153 (attorney's fees); § 541.154 (60-day pre-suit notice); § 541.156 (settlement offers). Foundational case: Twin City Fire Insurance Co. v. Davis , 904 S.W.2d 663 (Tex. 1995). Unfair-settlement-practice scope: Rocor International, Inc. v. National Union Fire Insurance Co. of Pittsburgh , 77 S.W.3d 253 (Tex. 2002). Chapter 542A pre-suit notice in property claims: Tex. Ins. Code Ch. 542A (HB 1774, 2017). Section 541.060, the unfair settlement practices Section 541.060(a) lists the principal unfair settlement practices: (1) misrepresenting a material fact or policy provision; (2) failing to attempt in good faith to effectuate prompt, fair, and equitable settlement when liability is reasonably clear (the Stowers parallel); (3) failing to provide reasonable explanation of denial; (4) failing to affirm or deny coverage within reasonable time after a proof-of-loss; (5) refusing to pay claim without conducting reasonable investigation ; (6) compelling claimant to institute suit by offering substantially less than amount ultimately recovered. Each subsection creates a distinct violation; multiple violations can be alleged concurrently. The Section 541.151 private cause of action Section 541.151 creates a private cause of action for any "person" who sustains "actual damages" caused by another's violation of Chapter 541. Standing extends to: (1) insureds; (2) third-party claimants in some contexts; (3) excess insurers in subrogation. Damages include: (1) actual damages , the loss caused by the unfair practice; (2) treble damages for knowing violations under Section 541.152; (3) court costs and reasonable attorney's fees under Section 541.153, mandatory for prevailing plaintiff. The statutory scheme provides substantially broader remedies than common-law bad-faith claims. Treble damages and "knowingly" Section 541.152(b) provides for up to three times actual damages where the violation is committed "knowingly." "Knowingly" requires actual awareness of the falsity, unfairness, or deceptiveness of the act constituting the violation; awareness can be inferred from objective manifestations. The treble damages provision is the principal teeth of Chapter 541, converting modest actual damages into substantially larger awards. Pleading "knowingly" requires factual support; conclusory allegations are insufficient. Pre-suit notice, Section 541.154 Section 541.154 requires written pre-suit notice at least 60 days before filing a Chapter 541 claim. The notice must (1) advise the defendant of the specific complaint; (2) include the amount of actual damages and attorney's fees claimed. Failure to provide proper notice typically results in abatement (allowing the defendant 60 days to respond) rather than dismissal. The pre-suit notice provides a settlement opportunity; rejected offers can affect post-suit damages. For property damage claims subject to Chapter 542A (HB 1774, 2017), the 60-day notice requirement is supplemented with additional requirements specific to weather-related property claims. Coordination with Stowers Chapter 541 and the common-law Stowers doctrine substantially overlap. Rocor International v. National Union (Tex. 2002) recognized that § 541.060(a)(2)(A) imposes essentially the same duty as Stowers, failing to attempt in good faith to effectuate settlement when liability is reasonably clear. Plaintiffs frequently plead both theories. The advantages of Chapter 541: (1) treble damages; (2) mandatory attorney's fees; (3) broader scope (covers more than just within-limits settlement). The advantages of Stowers: (1) excess judgment is the measure of damages (potentially substantial); (2) more developed case-law framework. Combined claims can substantially expand recoverable damages. Common claim categories Frequent Chapter 541 claim scenarios: (1) unreasonable denial of property claims , insurer denies legitimate claim without reasonable basis; (2) delay in payment , extended investigation and delays in payment; (3) misrepresentation of policy provisions , insurer misstates coverage in the claim file; (4) failure to investigate , denial without reasonable investigation; (5) lowball settlement offers , offering substantially less than the claim is worth, forcing litigation; (6) commercial coverage disputes , denial of CGL, D&O, or specialty claim coverage on insufficient grounds; (7) UM/UIM disputes , uninsured/underinsured motorist claim handling. Each scenario raises distinct unfair-settlement-practice analysis under § 541.060. Defenses to Chapter 541 claims Common defenses to Chapter 541 actions: (1) no underlying coverage , if the claim is not covered, denial cannot be unfair; (2) reasonable basis for action , insurer's actions were based on reasonable analysis; (3) genuine coverage dispute , bona fide coverage disputes do not constitute bad faith; (4> plaintiff did not give pre-suit notice , § 541.154; (5) statute of limitations , 2-year limitations period under § 541.162; (6) plaintiff's misrepresentation in the claim. The "reasonable basis" defense is critical: insurers can challenge claim positions in good faith without bad-faith exposure, but unreasonable conduct supports Chapter 541 liability. Chapter 542A overlay for property claims Chapter 542A (HB 1774, effective September 1, 2017) added specific procedures for property damage claims arising from "forces of nature", earthquakes, wildfires, tornadoes, lightning, hurricanes, hail, wind, snowstorms, rainstorms. The chapter overlays Chapter 541 obligations with: (1) 61-day pre-suit notice; (2) 30-day inspection right; (3) reduced statutory interest rate (5% above post-judgment rate vs. 18% standard); (4) limited attorney's fee recovery formula; (5) insurer election to accept agent liability. Property-damage Chapter 541 claims are now significantly modified by the Chapter 542A framework. Practical context For Texas commercial parties, Chapter 541 is among the most powerful statutory tools in insurance disputes. Best practice for plaintiff's counsel: (1) document specific § 541.060 violations contemporaneously with claim handling; (2) provide proper § 541.154 pre-suit notice with specific damages and fees; (3) plead "knowingly" with factual support for treble damages; (4) combine with Stowers for excess-judgment damages where applicable; (5) coordinate with Chapter 542A for property claims. Best practice for insurers: (1) maintain reasonable basis for all claim decisions with contemporaneous documentation; (2) communicate decisions promptly with reasonable explanations; (3) conduct reasonable investigations before denial; (4) avoid lowball settlement positions in claims with clear liability; (5) for property claims, comply with Chapter 542A procedures rigorously. The treble-damages and mandatory-fees structure makes Chapter 541 claims expensive for insurers; settlement rather than litigation is often the economic choice once bad-faith elements are well-pleaded. Related Terms Stowers Doctrine · Texas Prompt Payment of Claims Act · Commercial General Liability Insurance · Reservation of Rights · Deceptive Trade Practices Act Texas Payday Law § The primary Texas state statute (Tex. Lab. Code Chapter 61) governing the timing, frequency, and method of wage payment by Texas employers. Establishes pay-frequency requirements, regulates deductions, sets final-paycheck timing, and provides a TWC wage-claim mechanism with treble-damages liability for willful nonpayment. The Texas Payday Law, codified at Tex. Lab. Code Chapter 61 , is the primary state statute governing the timing, frequency, and method of wage payment by Texas employers. It establishes pay-frequency requirements, regulates permissible deductions from wages, sets timing requirements for final paychecks at separation, and provides an administrative wage-claim mechanism through the Texas Workforce Commission with treble-damages liability for willful nonpayment. Authority Tex. Lab. Code Ch. 61 : § 61.011 (pay frequency); § 61.012 (designated paydays); § 61.014 (final pay at separation); § 61.018 (deductions); § 61.0031 (treble damages for willful nonpayment); §§ 61.051–61.052 (wage claim filing and preliminary determination); § 61.067 (reciprocal collection). Administered by the Texas Workforce Commission. Pay frequency Non-exempt employees must be paid at least twice per month (semi-monthly). § 61.011(a) . Exempt employees (typically salaried managerial, professional, and administrative employees) may be paid once per month. § 61.011(b) . Employers must designate paydays in advance and post notice in the workplace. § 61.012 . Final pay at separation (§ 61.014) Involuntary termination (employer-initiated): wages must be paid within six calendar days of termination. Voluntary resignation (employee-initiated): wages must be paid by the next regularly scheduled payday following the date of resignation. Permissible deductions (§ 61.018) Wages may be withheld only when (1) authorized by law (taxes, garnishments, child support); (2) required by court order; or (3) authorized in writing by the employee. Employer "policies" purporting to authorize deductions without specific written employee authorization are insufficient. Wage claim mechanism An employee with unpaid wages may file a wage claim with TWC within 180 days of when the wages were due. § 61.051(c) . TWC investigates, issues a Preliminary Wage Determination Order, and may order payment, file an administrative lien ( § 61.081 ), or pursue collection. Both employer and employee have appeal rights. Treble damages for willful nonpayment Under § 61.0031 , where TWC determines that the employer's failure to pay wages was willful, the employer may be ordered to pay three times the wages owed. This treble-damages provision is among the most punitive features of Texas wage law. Practical context The Texas Payday Law is the everyday wage-payment statute for Texas employers. Compliance failures, late final paychecks, unauthorized deductions, off-cycle pay schedules, generate routine TWC wage claims and, in willful cases, triple-damages exposure. Coordination with FLSA (federal minimum wage and overtime) is critical: claims often involve both Payday Law (timing/deduction) and FLSA (amount) violations. Companion article: Wage and Hour Compliance in Texas Related Terms Final Paycheck · Wage Claim · Fair Labor Standards Act · Exempt vs. Non-Exempt Employee Texas Prompt Payment Act § Two parallel Texas statutes mandating timely payment on construction projects: Tex. Prop. Code Ch. 28 (private projects) and Tex. Gov't Code Ch. 2251 (public projects). On private projects, owner must pay prime within 35 days of invoice; prime must pay subs within 7 days of receiving owner payment. Late payments accrue 1.5%/month interest, with attorney's fees recoverable in litigation. The Texas Prompt Payment Act is two parallel statutes mandating timely payment on construction projects: Tex. Prop. Code Ch. 28 for private projects and Tex. Gov't Code Ch. 2251 for public projects. On private projects, the owner must pay the prime contractor within 35 days of receiving a proper payment request; the prime contractor must pay subcontractors within 7 days of receiving payment from the owner; and the same 7-day downstream rule applies at each lower tier. Late payments accrue interest at 1.5% per month, with attorney's fees recoverable in litigation. Authority Private project Prompt Payment Act: Tex. Prop. Code Ch. 28 ; §§ 28.001-28.010 . Key provisions: § 28.002 (payment timing, 35 days owner-to-prime); § 28.003 (subcontractor payment, 7 days); § 28.004 (interest on overdue payment, 1.5%/month); § 28.005 (attorney's fees and costs); § 28.006 (good-faith dispute exception); § 28.007 (right to suspend performance); § 28.009 (anti-waiver). Public project Prompt Payment Act: Tex. Gov't Code Ch. 2251 , with parallel structure but different timing, 30 days owner-to-prime, 10 days downstream payment. Private project payment timing Under § 28.002 , the owner must pay the prime contractor within 35 days of receiving a written payment request for properly performed work or suitably stored or specially fabricated materials. The prime contractor then has 7 days from receipt of owner payment to pay subcontractors, materialmen, and suppliers their proportionate share. Each lower tier in the contract chain has 7 days from receipt of upper-tier payment to pay its own downstream parties. The chain operates as a series of cascading 7-day deadlines triggered by actual receipt, not by the original invoice date. Public project payment timing Under Tex. Gov't Code § 2251.021 , governmental entities must pay vendors within 30 days of receiving a proper invoice. Prime contractors on public projects must pay subcontractors within 10 days of receiving payment from the governmental entity. The longer downstream window on public projects (10 vs. 7 days on private projects) reflects the greater administrative complexity of public-project payment processing. Interest, attorney's fees, and right to suspend Late payment under either Act accrues interest at 1.5% per month (Property Code § 28.004; Government Code § 2251.025). In litigation to recover an unpaid amount, the court may award reasonable attorney's fees and costs to the prevailing party (§ 28.005; § 2251.043). On private projects, an unpaid contractor or subcontractor has the statutory right to suspend performance after 10 days' written notice if payment is not made (§ 28.007), a powerful remedy that effectively shifts owner-payment risk to a stop-work threat. The public-project act does not include an analogous suspension right. Good-faith dispute exception An owner or upper-tier contractor may withhold payment for a "good-faith dispute", defined in § 28.001 for private projects to mean a dispute over whether the work was performed in a proper manner. An owner withholding payment under this exception may withhold up to 110% of the disputed amount under § 28.006. The "good faith" requirement is fact-intensive and frequently litigated; pretextual withholding to obtain commercial leverage does not qualify and exposes the withholding party to interest, attorney's fees, and (on private projects) the contractor's right to suspend performance. Anti-waiver Section 28.009 makes the private-project Prompt Payment Act non-waivable, a contractual provision purporting to waive its protections is void. The single exception is for residential single-family construction, where contracts may extend the owner's payment window beyond 35 days (with the same 1.5%/month interest still applicable). The non-waiver rule means standard subcontract pay-when-paid clauses cannot extend the 7-day downstream payment requirement once funds are received. Practical context For Texas contractors, subcontractors, and suppliers, the Prompt Payment Act is a powerful collection tool, interest, attorney's fees, and stop-work rights make late payment substantially more expensive than timely payment. Best practice: (1) calendar payment-request and payment-receipt dates with 7-day and 35-day downstream tracking; (2) document delivery of payment requests via certified mail or other proof-of-receipt method; (3) deliver written demand for late payment promptly with statutory citation; (4) on private projects, deliver 10-day suspension notice if payment remains overdue. For owners and upper-tier contractors, calendaring payment deadlines and avoiding pretextual "good-faith dispute" withholding is the most cost-effective compliance posture. Related Terms Construction Contract · Mechanic's and Materialman's Lien · Texas Construction Anti-Indemnity Act · Retainage · Pay-When-Paid vs. Pay-If-Paid Texas Prompt Payment of Claims Act § 2024 Texas Insurance Code Chapter 542, Subchapter B, imposes deadlines on insurers for acknowledging, investigating, and paying claims. Violations carry statutory interest (18% per annum) and mandatory attorney's fees. Chapter 542A (added in 2017) modifies the framework for property damage claims arising from forces of nature, reduced 5% interest rate, 61-day pre-suit notice with specific requirements, attorney's fee formula, and insurer election rights. The Texas Supreme Court's 2024 Rodriguez v. Safeco decision clarified attorney's fee limits under 542A. The Texas Prompt Payment of Claims Act (TPPCA), codified in Chapter 542, Subchapter B of the Insurance Code, imposes specific deadlines on insurers for acknowledging, investigating, and paying claims. Violations carry significant penalties, statutory interest (18% per annum on standard claims, 5% above post-judgment rate on Chapter 542A claims) and mandatory attorney's fees. The TPPCA is one of the most-used insurance statutes in Texas; combined with Chapter 541 and Stowers, it forms the principal framework for insurance bad-faith and delay litigation. Chapter 542A (HB 1774, 2017) substantially modified the framework for weather-related property damage claims. Authority Texas Prompt Payment of Claims Act: Tex. Ins. Code Ch. 542, Subch. B (§§ 542.051-542.061). Specific deadlines: § 542.055 (acknowledgment within 15 days); § 542.056 (claim acceptance/rejection deadline); § 542.057 (payment deadlines after acceptance); § 542.058 (extension provisions); § 542.060 (penalties, 18% interest and mandatory attorney's fees). Chapter 542A (forces of nature property damage): Tex. Ins. Code Ch. 542A ; § 542A.003 (pre-suit notice); § 542A.004 (inspection right); § 542A.006 (insurer agent liability election); § 542A.007 (attorney's fee formula). Recent: Rodriguez v. Safeco Insurance Co. of Indiana , No. 23-0534, 2024 WL 388142 (Tex. 2024) (attorney's fees preclusion); Barbara Technologies Corp. v. State Farm Lloyds , 589 S.W.3d 806 (Tex. 2019); Ortiz v. State Farm Lloyds , 589 S.W.3d 127 (Tex. 2019). The standard TPPCA deadlines Section 542.055 imposes the principal deadlines: (1) acknowledgment , insurer must acknowledge claim within 15 days of receipt; (2) claim decision , insurer must accept or reject claim within 15 days of receiving all items, statements, and forms reasonably requested (with extension provisions in § 542.058); (3) payment , if accepted, payment must be made within 5 business days of acceptance (Section 542.057). Each deadline triggers separate consequences for non-compliance. Failure to comply with any deadline, when followed by a judgment in favor of the claimant, triggers the 18% interest penalty and mandatory attorney's fees. The 18% interest penalty Section 542.060(a) provides that an insurer not in compliance with TPPCA deadlines "is liable to pay the holder of the policy, in addition to the amount of the claim, simple interest on the amount of the claim as damages each year at the rate of 18 percent" plus reasonable and necessary attorney's fees. The 18% interest is substantially above market rates and provides strong incentive for prompt insurer compliance. Interest accrues from the date the claim was required to be paid (i.e., from the missed deadline) through judgment. Chapter 542A, the 2017 reform Chapter 542A, effective September 1, 2017 (HB 1774), substantially modified TPPCA application to property damage claims caused by "forces of nature", earthquakes, wildfires, tornadoes, lightning, hurricanes, hail, wind, snowstorms, rainstorms. The chapter responded to a perceived crisis of weather-related claim litigation following major hailstorms. Key changes: (1) 61-day pre-suit notice , claimant must provide written notice 61 days before suit, with specific facts, amount alleged owed, and attorney fee calculation; (2) 30-day inspection right , insurer can request inspection within 30 days; (3) reduced interest rate , 5% above post-judgment rate (currently around 13.5% total) instead of 18%; (4) attorney's fee formula , limits fees based on amount awarded vs. amount alleged; (5) insurer agent election , insurer can accept its agent's liability and dismiss claims against the agent. Chapter 542A pre-suit notice requirements Section 542A.003(b) requires the pre-suit notice to include: (1) statement of acts or omissions , specific facts giving rise to the claim; (2) specific amount alleged owed , dollar amount on the claim under the policy; (3) amount of attorney's fees , calculated from contemporaneous time records using customary hourly rates. Failure to provide proper notice can result in abatement and limitations on attorney fee recovery. The specific-amount requirement is critical, vague notices that don't state a sum certain may be deficient under Rodriguez analysis. Rodriguez v. Safeco, the 2024 attorney's fee preclusion Rodriguez v. Safeco Insurance Co. of Indiana , No. 23-0534 (Tex. 2024) addressed a critical Chapter 542A question: whether an insurer's full payment of an appraisal award plus interest precludes recovery of attorney's fees. The Texas Supreme Court answered yes, the § 542A.007(a)(3) attorney's fee formula calculates fees based on "the amount to be awarded in the judgment to the claimant... under the insurance policy." If the insurer pays the full appraisal award plus any possible interest before judgment, there is no "amount to be awarded in the judgment," so the fee calculation under (a)(3) yields zero, which is always the "lesser of" the three formula methods. Result: insurers can substantially eliminate attorney fee exposure by promptly paying appraisal awards plus interest. Section 542A.006, the agent election Section 542A.006 allows the insurer to elect to accept the legal responsibility of its agent (employee, agent, representative, or adjuster) for acts related to the claim. Once the election is made: (1) before lawsuit , no cause of action exists against the agent; if claimant nevertheless sues, the court must dismiss with prejudice; (2) after lawsuit , the court must dismiss the action against the agent. The election prevents claimants from forcing diversity jurisdiction by joining a Texas-resident agent against an out-of-state insurer. The election is irrevocable as to the specific claim. Common TPPCA claim scenarios Frequent TPPCA claim categories: (1) property claims with delayed payment , fire, flood, hail, wind damage; (2) liability claims with delayed handling , auto, premises, products; (3) uninsured/underinsured motorist claims ; (4) commercial coverage disputes , CGL, D&O delay; (5) health insurance claims , though many subject to ERISA preemption; (6) life and disability claims , particularly significant given the simple-interest accrual. Coordination with Chapter 541 and Stowers TPPCA claims typically coordinate with Chapter 541 and Stowers: (1) different remedies , TPPCA provides interest penalty; Chapter 541 provides treble damages; Stowers provides excess judgment recovery; (2) different elements , TPPCA focuses on deadlines; Chapter 541 on substantive unfair practices; Stowers on settlement decisions; (3) combined claims , single claim can support all three theories for different damages. Sophisticated bad-faith litigation typically pleads all applicable theories. Practical context For Texas commercial parties, the TPPCA is among the most consequential insurance statutes. Best practice for claimants: (1) document claim timing meticulously (date of submission, requested information, deadlines); (2) for property damage claims, comply rigorously with Chapter 542A pre-suit notice (61 days, specific amount, fee calculation); (3) coordinate TPPCA with Chapter 541 and Stowers theories; (4) post-Rodriguez, recognize that pre-judgment payment of full claim plus interest can preclude fee recovery, claim-prosecution timing matters. Best practice for insurers: (1) maintain rigorous claim-deadline tracking; (2) document compliance contemporaneously; (3) for property damage, use Chapter 542A inspection rights; (4) consider §542A.006 agent election in appropriate cases; (5) post-Rodriguez, recognize the strategic value of prompt payment of appraisal awards plus interest. Common pitfalls: claimants treating TPPCA as automatic 18% interest without recognizing reduced 542A rate; insurers missing 542A deadlines and triggering interest exposure. Calendar discipline is foundational. Related Terms Texas Insurance Code Chapter 541 · Stowers Doctrine · Post-Judgment Interest · Attorney's Fees Recovery · Deceptive Trade Practices Act Texas Restrictive Covenant Statute § Tex. Bus. & Com. Code §§ 15.50-15.52, the exclusive Texas statutory framework for enforcement of covenants not to compete. Section 15.50 sets enforceability criteria (ancillary to enforceable agreement; reasonable in time, geography, scope). Section 15.51 governs procedures, requires reformation of overly broad covenants, and provides fee shifting in some cases. Section 15.52 preempts common-law alternatives. Marsh USA v. Cook (Tex. 2011) substantially relaxed the framework; post-Marsh covenants are increasingly enforceable. Tex. Bus. & Com. Code §§ 15.50-15.52, the Texas Restrictive Covenant Statute, provides the exclusive framework for enforcement of covenants not to compete in Texas. Section 15.50 sets the enforceability criteria. Section 15.51 governs procedures, requires reformation of overly broad covenants, and provides fee shifting in some cases. Section 15.52 preempts common-law alternatives. The framework was substantially relaxed by Marsh USA v. Cook , 354 S.W.3d 764 (Tex. 2011); post-Marsh covenants are increasingly enforceable in Texas, contrary to the doctrine's earlier reputation as a "covenant graveyard." Authority Texas statute: Tex. Bus. & Com. Code §§ 15.50-15.52 . Section 15.50: criteria for enforceability; subsection (a) general standard; subsection (b) physician-specific framework. Section 15.51: procedures, remedies, reformation, fee-shifting in narrow circumstances. Section 15.52: preemption. Foundational cases: Light v. Centel Cellular Co. of Texas , 883 S.W.2d 642 (Tex. 1994) (pre-Sheshunoff framework); Alex Sheshunoff Mgmt. Servs. v. Johnson , 209 S.W.3d 644 (Tex. 2006); Marsh USA Inc. v. Cook , 354 S.W.3d 764 (Tex. 2011) (relaxed "ancillary to" standard); Calhoun v. Jack Doheny Companies , 967 F.3d 471 (5th Cir. 2020) (reformation at preliminary injunction). FTC's 2024 attempt to ban most non-competes vacated by federal district court; current federal landscape uncertain. The Section 15.50 framework Section 15.50(a) establishes the enforceability criteria: a covenant not to compete is enforceable if it is "ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee." The two-part test: (1) "ancillary to or part of an otherwise enforceable agreement" ; (2) reasonable in time, geography, and scope . The "ancillary to" requirement, Marsh evolution The "ancillary to" requirement has evolved substantially: (1) Light era (pre-2006) , required simultaneous exchange of consideration; non-competes ancillary to at-will employment generally void; (2) Sheshunoff (2006) , permitted "unilateral promises" (employer's promise to provide confidential information that ripens into binding obligation when fulfilled); (3) Marsh (2011) , substantially relaxed: covenant must be "supplementary or part of" an otherwise enforceable agreement; the agreement must be "reasonably related to the interest worthy of protection" (goodwill, confidential information, customer relationships). Post-Marsh, stock-option grants, equity awards, and other consideration types support non-competes in many circumstances. Most modern Texas non-competes structured around equity grants, confidential information disclosure, or specialized training satisfy the ancillary requirement. Reasonableness analysis The reasonableness analysis examines time, geography, and scope: (1) time , typically 1-3 years post-employment; longer periods harder to defend; (2) geography , must be reasonably tied to where employee performed work or had customer contact; nationwide covenants difficult to enforce; (3) scope of activity , must be limited to the activities performed for the employer or competitive business; broad "any competing business" language frequently overbroad. The standard: "no greater restraint than is necessary to protect the goodwill or other business interest of the promisee." The reformation requirement Section 15.51(c) requires reformation of overly broad covenants, Texas courts must reform unreasonable covenants to the extent necessary to make them reasonable, rather than refusing to enforce them entirely. Calhoun v. Jack Doheny (5th Cir. 2020) confirmed reformation can occur at the preliminary injunction stage. Reformation is a substantial advantage for employers, even overbroad covenants generally produce some enforceable scope. However, § 15.51(c) provides that if the original covenant was overly broad and the employer "sought to enforce the covenant to a greater extent than was necessary," the court may award the defendant employee reasonable attorney's fees incurred in defending the action. Fee shifting is rare but creates risk for aggressive employer enforcement strategies. Burden of proof allocation Section 15.51(b) allocates burdens based on agreement purpose: (1) personal services agreements (employment), promisee (employer) bears burden of establishing § 15.50 criteria; (2) other agreements (sale of business, partnership exit), promisor bears burden of establishing covenant does not meet criteria. Physician covenants, § 15.50(b) Section 15.50(b) provides specific framework for physician non-competes: enforceable only if covenants do not deny physician access to patient list; provide access to patient medical records; provide for buy-out at reasonable price; permit continuing care for acute illness even after termination. Section 15.52 preemption Section 15.52 preempts common-law alternatives: the criteria and procedures provided by §§ 15.50-15.51 are "exclusive and preempt any other criteria for enforceability of a covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under common law or otherwise." Texas covenant enforcement is exclusively statutory. FTC noncompete ban, current status The FTC issued a final rule in April 2024 attempting to ban most non-compete agreements nationwide. The rule was challenged and a federal district court vacated it in August 2024. Current federal landscape: the FTC ban is not in effect; state-law frameworks continue to govern. Texas employers should rely on the state-law framework while monitoring federal developments. Practical context For Texas employers, the post-Marsh framework substantially supports non-compete enforcement when properly structured. Best practice: (1) tie covenants to confidential information access, equity grants, or specialized training; (2) draft reasonable scope, 1-2 years post-employment, geography matching actual customer contact, scope limited to actual competitive activities; (3) include severability and reformation language; (4) coordinate with confidentiality agreements and trade-secret protections; (5) for physicians, comply with § 15.50(b) requirements; (6) avoid overbroad initial drafting, fee-shifting risk under § 15.51(c). For employees: (1) review covenant scope before signing, overbroad covenants are reformed but not voided; (2) document the actual scope of work and customer contact for later geography/scope challenges; (3) understand that Texas reformation creates uncertainty. Common drafting failure: nationwide or "any competing business" scope, almost always reformed substantially narrower, with potential fee-shifting. Companion article: Non-Competes in Texas Related Terms Noncompete Agreement · Nonsolicitation Agreement · Confidentiality Agreement · Restrictive Covenant · Trade Secret Texas Rules of Civil Procedure § The procedural rules governing civil litigation in Texas state courts. Promulgated by the Texas Supreme Court, the TRCP cover pleadings, motions, discovery, trial procedure, and post-trial remedies. Distinct from the Federal Rules of Civil Procedure, which govern federal-court practice. The Texas Rules of Civil Procedure (TRCP) are the procedural rules governing civil litigation in Texas state courts. Promulgated by the Texas Supreme Court under statutory authority, the TRCP cover pleadings, motions, discovery, trial procedure, and post-trial remedies. The TRCP are distinct from the Federal Rules of Civil Procedure (FRCP), which govern federal-court practice and are sometimes used as persuasive authority in Texas state courts. Authority Promulgated by the Texas Supreme Court under Tex. Gov't Code §§ 22.003–22.004 . Last comprehensive revision: 2013, with periodic updates. Texas Business Court Rules supplement the TRCP for matters in the Business Court. Structure The TRCP are organized topically: pleadings (Rules 45–98), parties (Rules 28–44), pretrial procedure (Rules 165a–168), discovery (Rules 190–215), trial (Rules 216–298), judgment (Rules 299–329b), and appeals (Rules 329c–356). Specialized rules govern temporary restraining orders (Rules 680–693a), eminent domain, and other categories. Relationship to other authorities TRCP procedures must be read alongside (1) the Texas Civil Practice and Remedies Code (statutory framework for many causes of action and procedures); (2) the Texas Government Code (court structure, judicial qualifications); (3) local rules of individual judicial districts; and (4) Texas Business Court Rules for business-court matters. Recent developments The Texas Supreme Court adopted Texas Rules of Civil Procedure for the Business Court effective with HB 40 (Sept. 1, 2025), addressing jurisdictional determination procedures and interlocutory appeals. Practical context The TRCP are foundational to all Texas state-court litigation. Practitioners must master pleadings (Rules 47, 91a, 92), discovery (Rules 192–200), summary judgment (Rule 166a), and trial procedure. Federal-court practitioners moving to Texas state court must adjust to TRCP-specific procedures (general denial, no-evidence summary judgment, three-tier discovery levels). Related Terms Texas Business Court · Petition / Complaint · Discovery · Summary Judgment Texas Sales and Use Tax § Texas's principal transaction-based tax, 6.25% state rate plus up to 2% local tax (combined cap 8.25%) on retail sales of tangible personal property and certain services. Post-Wayfair economic nexus threshold for remote sellers: $500,000 in Texas gross receipts in the preceding twelve months. Permits issued by the Texas Comptroller; reports filed monthly, quarterly, or annually depending on tax liability. Texas Sales and Use Tax is the state's principal transaction-based tax, imposed on retail sales of tangible personal property and certain enumerated services in Texas (sales tax) and on the use, storage, or consumption of taxable items purchased outside Texas (use tax). The state rate is 6.25%; local jurisdictions (cities, counties, special-purpose districts, transit authorities) may add up to 2% additional, capped at a combined rate of 8.25%. The tax is administered by the Texas Comptroller of Public Accounts. Authority Statute: Tex. Tax Code Ch. 151 (Limited Sales, Excise, and Use Tax). Implementing rules: 34 Tex. Admin. Code § 3.281 et seq.; Rule 3.286 (seller's and purchaser's responsibilities, post-Wayfair). Constitutional foundation for economic nexus: South Dakota v. Wayfair, Inc. , 138 S. Ct. 2080 (2018) (overruling Quill Corp. v. North Dakota , 504 U.S. 298 (1992)). Local sales tax authority: Tex. Tax Code Chs. 321-323 . What is taxable Tangible personal property is broadly taxable except as exempted. Texas taxes far fewer services than many states, but selected services are taxable, including: amusement services, cable television, credit reporting, data processing services, debt collection, information services, insurance services, internet access (up to $25/month exemption), motor vehicle parking, nonresidential real property repair/remodeling, personal property repair, personal services, real property services (e.g., landscaping, janitorial), security services, telecommunications, telephone answering, and utility transmission/distribution. Sales for resale are exempt with a properly executed resale certificate; sales to exempt entities require an exemption certificate. Economic nexus, post-Wayfair Following South Dakota v. Wayfair , Texas adopted economic nexus for remote sellers effective October 1, 2019. Threshold: total Texas revenue of $500,000 or more in the preceding twelve calendar months, a rolling twelve-month test, not calendar-year-based, with no transaction-count component. Total Texas revenue includes gross revenue from sales of tangible personal property and taxable services for storage, use, or consumption in Texas, including taxable, exempt, and resale transactions. Remote sellers crossing the threshold must obtain a permit and begin collecting tax by the first day of the fourth month after the month in which the threshold was exceeded. Single Local Use Tax Rate Remote sellers may elect to collect local use tax at a "Single Local Use Tax Rate" (1.75% as of 2026) instead of computing the actual rate at each customer's destination, a substantial simplification given Texas's 1,800+ local taxing jurisdictions. The election is made via Form 01-799 and applies to all of the seller's Texas use-tax obligations going forward. In-state sellers cannot use the Single Local Rate option. Marketplace facilitator collection Marketplace facilitators (Amazon, eBay, Etsy, Walmart Marketplace, etc.) are responsible for collecting and remitting Texas sales tax on sales they facilitate, regardless of whether the underlying seller has nexus. Marketplace sales count toward the $500,000 economic nexus threshold for the underlying seller (since April 1, 2020), but if all of a remote seller's Texas sales are made through marketplace facilitators that certify they collect tax, the seller is not required to obtain its own permit. Filing frequency and reports Filing frequency depends on tax liability: monthly (most permittees with significant tax), quarterly (typically collecting under $1,500 per quarter), or annually (under $1,000 annually with timely filing history). Reports are due on the 20th of the month following the reporting period. Texas Tax Code Ch. 151 imposes meaningful penalties for late filing (5% if 1-30 days late, 10% over 30 days) plus interest, and significant penalties for failure to obtain a required permit. Practical context For Texas SMBs, the most common sales-tax compliance gaps are: (1) failing to recognize that selected services (especially data processing, repairs, security services) are taxable; (2) crossing into multistate territory without monitoring economic-nexus thresholds in other states; (3) unintentionally creating physical-presence nexus through remote employees, inventory in 3PL warehouses, or trade-show attendance; (4) failure to maintain valid resale and exemption certificates from customers claiming exempt status. The compliance burden rises sharply with multi-state operations, most growing businesses should use sales-tax automation software (Avalara, TaxJar, etc.) once they exceed nexus in 3+ states. Related Terms Texas Franchise Tax · Sale of Goods · Foreign Entity · Independent Contractor · Registered Agent Texas Securities Act § Codified at Tex. Gov't Code §§ 4001-4008 (recodified from former Vernon's Ann. Civ. St. art. 581-1), the Texas Securities Act governs securities offerings and sales involving Texas. The Act requires registration of securities offered in Texas unless an exemption applies, regulates dealers and agents, and provides anti-fraud enforcement authority for the Texas State Securities Board. Largely preempted for federal "covered securities" under NSMIA, but state notice filings and anti-fraud enforcement remain. The Texas Securities Act (TSA) is the principal Texas statutory framework for securities regulation. Codified at Tex. Gov't Code §§ 4001-4008 (recodified from former Vernon's Ann. Civ. St. art. 581-1 in 2019), the Act governs securities offerings and sales involving Texas. The TSA requires registration of securities offered in Texas unless an exemption applies, regulates dealers and agents, and provides anti-fraud enforcement authority. The National Securities Markets Improvement Act of 1996 (NSMIA) preempted state registration for "covered securities", but Texas retains notice filing requirements, fee authority, and anti-fraud enforcement. Authority Texas statute: Tex. Gov't Code Title 12, Subtitle B (§§ 4001.001-4008.105) . Recodified from Vernon's Ann. Civ. St. art. 581-1 effective Jan. 1, 2022. Securities registration: § 4003.001 et seq. Dealer/agent registration: § 4004.001 et seq. Exemptions: § 4005.001 et seq. Civil liability: § 4008.001 et seq. Texas State Securities Board: § 4002.001 et seq. Federal preemption: 15 U.S.C. § 77r (NSMIA). Texas State Securities Board The Texas State Securities Board (TSSB) administers and enforces the TSA. The Board is the principal Texas state agency for securities regulation. Functions: (1) securities registration review and approval; (2) dealer and agent registration ; (3) investment adviser regulation ; (4) notice filings for federal covered securities; (5) enforcement , civil and criminal; (6) investor education . Headquartered in Austin; coordinates with SEC and other state regulators through NASAA (North American Securities Administrators Association). Securities registration in Texas Securities offered or sold in Texas must be registered under the TSA unless an exemption applies. Registration methods: (1) coordination , concurrent SEC registration; primarily relevant for IPOs; (2) qualification , substantive review by TSSB; rare in modern practice; (3) filing , notice procedure for certain federal-covered offerings. Registration is rare in modern practice, most offerings rely on exemptions or NSMIA preemption. Common exemptions The TSA includes exemptions for: (1) federal covered securities , NSMIA preemption; notice filing required; (2) private offerings , § 4005.011 (parallel to federal Reg D framework); (3) institutional investor sales , § 4005.012; (4) existing security holder offerings ; (5) limited offerings , small offerings to limited investors; (6) federal exempt securities , government securities, bank securities, etc. Each exemption has specific requirements; counsel review is essential before reliance. NSMIA preemption framework The National Securities Markets Improvement Act of 1996 (NSMIA) preempts state registration for "covered securities," including: (1) SEC-registered securities , Form S-1, S-3, F-1, etc.; (2) Rule 506 offerings (both 506(b) and 506(c)); (3) certain investment company securities ; (4) specific other categories . States retain authority to: (a) require notice filings and fees; (b) enforce anti-fraud provisions; (c) regulate broker-dealers and agents. The preemption framework simplifies multi-state offerings substantially, Rule 506 offerings need only file notice with each state where sales occur, not register in each state. Texas notice filing requirements For federal covered securities sold to Texas residents, notice filing with TSSB is required. Standard requirements for Rule 506 offerings: (1) copy of Form D ; (2) filing fee ; (3) Form U-2 (consent to service of process); (4) typically due within 15 days of first sale to Texas resident ; (5) amendments for material changes. Other federal-covered securities (Reg A+, Rule 147A, etc.) have parallel notice procedures. Failure to make notice filing does not void federal exemption but exposes issuer to TSSB enforcement and potential rescission liability. Dealer and agent registration The TSA requires registration of: (1) dealers , persons engaged in selling securities; (2) agents , individuals representing dealers; (3) investment advisers , providing investment advice; (4) investment adviser representatives . Registration involves examination, application, and ongoing reporting. Texas coordinates registration through the Central Registration Depository (CRD) for FINRA-affiliated dealers, with parallel registration for state-only registrants. Issuer-direct sales are typically exempt if conducted by officers and directors without compensation tied to sales. Civil liability, § 4008 The TSA provides private cause of action for securities violations under § 4008.001-4008.105: (1) rescission rights , investors can rescind purchases for unregistered securities or material misrepresentations; (2) damages , for losses caused by violations; (3) three-year statute of limitations for most claims; (4) strict liability for unregistered offerings (no scienter required); (5) attorney's fees available in some claims. The civil liability framework parallels federal Section 12(a)(1) and Section 12(a)(2) of the Securities Act, with similar rescission remedy for violations. Anti-fraud enforcement The TSA includes broad anti-fraud provisions parallel to federal Rule 10b-5: prohibits material misrepresentations, omissions, and fraudulent conduct in securities transactions. The TSSB has authority to: (1) issue cease and desist orders; (2) impose administrative penalties; (3) refer matters for criminal prosecution; (4) coordinate with SEC and other states. Texas anti-fraud enforcement remains in full force despite NSMIA preemption, states retain anti-fraud authority over all securities transactions involving their residents. Practical context For Texas issuers, TSA compliance is operational but cannot be ignored. Best practice: (1) for Rule 506 offerings, file Texas notice with TSSB within 15 days of first sale to Texas resident; (2) maintain documentation of notice filings and fees; (3) for small offerings or local-only offerings, evaluate Rule 504 vs. Rule 506 trade-offs (504 requires state-by-state compliance; 506 preempts state registration); (4) ensure dealer/agent compliance for any compensated sales activity, issuer-direct sales by officers/directors without sales compensation typically exempt; (5) maintain anti-fraud discipline regardless of federal preemption, Texas anti-fraud enforcement is independent. For investors: (1) verify TSSB notice filing for offerings sold to Texas residents; (2) preserve TSA rescission rights under § 4008, three-year statute of limitations; (3) coordinate state and federal claims for anti-fraud. Common pitfall: issuers focused on federal Reg D compliance forget Texas notice filing, exposing themselves to TSSB enforcement and potential rescission liability for technical violations. Related Terms Regulation D · Form D · Accredited Investor · Private Placement Memorandum · Regulation CF Texas Workforce Commission (TWC) § The Texas state agency administering employment-related programs including unemployment insurance, the Civil Rights Division (TCHRA enforcement), workforce development, child labor enforcement, and wage claims under the Texas Payday Law. Established in 1995, the TWC consolidates functions previously distributed across multiple state agencies. Most Texas employer interactions with state employment regulation involve TWC. The Texas Workforce Commission (TWC) is the Texas state agency administering employment-related programs including unemployment insurance, the Civil Rights Division (TCHRA enforcement), workforce development, child labor enforcement, and wage claims under the Texas Payday Law. Established in 1995, the TWC consolidates functions previously distributed across multiple state agencies. The TWC is the principal state-government interface for Texas employers on employment regulation matters. Coordinated work-share arrangements with federal agencies (EEOC, DOL) make TWC the typical first stop for both state and federal employment regulation issues. Authority Texas statute: Tex. Lab. Code Title 4 . Establishment and authority: Ch. 301 . Civil Rights Division: Tex. Lab. Code Ch. 21 ; originally the Texas Commission on Human Rights, transferred to TWC in 2004. Unemployment Insurance: Tex. Lab. Code Ch. 201 et seq. Wage claims: Tex. Lab. Code Ch. 61 (Texas Payday Law). Child labor: Tex. Lab. Code Ch. 51 . Federal coordination: work-share agreement with EEOC under 29 C.F.R. § 1601.74 . Unemployment insurance administration The TWC administers Texas unemployment insurance: (1) employer registration , quarterly UI tax returns; (2) UI tax assessments , based on payroll and experience rating; (3) claim processing ; (4) appeals , three-level appeal structure (deputy decision, appeal tribunal, full Commission); (5) employer hearing participation . Most employer-TWC interactions involve unemployment claims; experience-rating implications make claim contests financially significant for stable employers. Civil Rights Division The TWC Civil Rights Division (TWC-CRD), formerly the Texas Commission on Human Rights, administers TCHRA. The Division receives TCHRA charges, conducts investigations, operates work-share with EEOC (charges filed with either agency typically deemed filed with both), issues right-to-sue letters, and conducts conciliation for reasonable-cause findings. The work-share extends federal Title VII filing deadline to 300 days in Texas; TCHRA deadline remains 180 days. Texas Payday Law administration The TWC administers the Texas Payday Law (Tex. Lab. Code Ch. 61): (1) wage claims , employees can file claims for unpaid wages with TWC; (2) 180-day filing deadline ; (3) investigation and determination ; (4) appeal procedures ; (5) collection . The Payday Law process is faster and cheaper than civil litigation for most wage disputes. Common claim types: unpaid final wages, commission disputes, vacation/PTO payouts, wage rate disputes. Workforce development services The TWC provides workforce development services: (1) WorkInTexas.com , state job search platform; (2) Workforce Solutions , local centers; (3) job training programs , Skills Development Fund, JET grants; (4) employer services , recruitment, hiring assistance, layoff assistance; (5) veteran employment programs ; (6) vocational rehabilitation services . Common employer interactions Recurring employer-TWC interactions: (1) quarterly UI tax filings and payments; (2) UI claim responses; (3) UI appeals; (4) TCHRA charge responses through Civil Rights Division; (5) Payday Law claim defense; (6) experience rating assessments; (7) workforce development partnerships; (8) occasional audits. Practical context For Texas employers, TWC compliance is foundational. Best practice: (1) maintain compliant quarterly UI filings; (2) respond to UI claims promptly with documentation; (3) calendar TCHRA charge response deadlines; (4) maintain Texas Payday Law compliance, particularly final wage payment timing and commission/bonus accrual; (5) evaluate workforce development resources for hiring needs. For employees: (1) understand UI eligibility; (2) file Payday Law claims promptly (180-day deadline); (3) coordinate UI claims with TCHRA discrimination charges where applicable; (4) leverage workforce development services. Common gap: employers ignoring UI claim notices or providing minimal documentation, generating poor outcomes that affect experience rating. Companion article: Before Firing an Employee Related Terms Texas Commission on Human Rights Act · Unemployment Compensation · Texas Payday Law · EEOC Charge · Wage Claim Title Insurance § An indemnity contract under which a title insurer agrees to defend the insured against title defects existing as of the policy date and to pay losses up to the policy amount. Texas title insurance is heavily regulated, premium rates and policy forms are promulgated by the Texas Department of Insurance. Two principal forms: T-1 owner's policy (protects buyer); T-2 loan policy (protects lender). One-time premium paid at closing. Title insurance is an indemnity contract under which a title insurer agrees, in exchange for a one-time premium paid at closing, to defend the insured against title defects existing as of the policy date and to pay losses up to the policy amount. Unlike most insurance products that protect against future events, title insurance protects against past events that may surface later, undisclosed liens, defective deeds in the chain of title, forgeries, errors in public records, and similar issues predating the policy. Texas title insurance is among the most heavily regulated in the United States; the Texas Department of Insurance promulgates both premium rates and policy forms. Authority Texas title insurance regulation: Tex. Ins. Code Ch. 2501-2703 . Texas Department of Insurance Title Manual; promulgated rates and forms; minimum standards. Standard policy forms: T-1 (Owner's Policy of Title Insurance); T-2 (Loan Policy of Title Insurance); T-3 (Endorsement). Escrow rules: Tex. Ins. Code Ch. 2502 . Real Estate License Act effects on broker representation: Tex. Occ. Code Ch. 1101 . Owner's policy vs. loan policy The two principal Texas title insurance products are: (1) T-1 Owner's Policy , protects the buyer (or other owner) against title defects affecting the insured estate, with coverage equal to the purchase price; remains in force as long as the insured (or successor heirs) holds title; covers defense costs in addition to loss amounts. (2) T-2 Loan Policy , protects the lender against title defects affecting the priority of the insured mortgage; coverage equal to the loan balance; decreases as the loan is paid down; assignable with the loan. Most commercial closings include both, the owner's policy benefits the buyer; the loan policy benefits the lender. The commitment process Title insurance issues only after a commitment process: (1) the title company performs a title search reviewing the chain of title, encumbrances, easements, restrictions, judgments, taxes, and other matters of record; (2) the title company issues a title commitment identifying the proposed insured, the property, the policy amount, and the proposed exceptions; (3) the buyer reviews the commitment and objects to specific exceptions; (4) the parties resolve objections (cure, waive, or terminate); (5) closing occurs and the policy issues. The commitment review and objection period are critical, exceptions in the commitment become exceptions in the policy and are not insured. Standard policy structure Texas title insurance policies have four schedules: Schedule A (proposed insured, property, amount, effective date); Schedule B (exceptions to coverage, what the policy does NOT insure); Schedule C (requirements that must be met before issuance); Schedule D (disclosures, including escrow agent identity and premium splits among insurers). Standard exceptions (the "general exceptions") include matters arising after policy date, claims of parties in possession, easements not disclosed by the public records, and discrepancies that an accurate survey would reveal. Each general exception can typically be deleted or modified through endorsements at additional premium. Coverage and exclusions The standard owner's policy insures against (1) defects in title; (2) liens or encumbrances on title; (3) lack of right of access; and (4) unmarketability of title. Standard exclusions (matters never covered) include: (1) restrictions, regulations, and ordinances by governmental authority; (2) eminent domain unless notice was recorded; (3) defects, liens, or encumbrances created or known by the insured but not disclosed to the insurer; (4) results of failure of consideration; (5) governmental forfeiture. Endorsements Texas title insurers offer numerous endorsements that expand or modify standard coverage, including: T-19 (restrictions, encroachments, minerals); T-19.1 (residential restrictions); environmental endorsement ; access endorsement ; mineral endorsement ; condemnation endorsement . Each endorsement carries an additional premium. Sophisticated commercial buyers typically negotiate a slate of endorsements addressing specific transaction risks. Practical context For Texas commercial real estate buyers, title insurance is the principal protection mechanism against pre-closing title defects, substantially more important than the deed warranty itself. The title commitment review is the most concentrated risk-identification opportunity in the transaction. Buyers should (1) thoroughly review every Schedule B exception with counsel; (2) order any exceptions cured rather than accepting them; (3) negotiate appropriate endorsements; (4) require the seller to deliver a current survey and tenant estoppels supporting the coverage. Sloppy title commitment review is a frequent source of post-closing disputes and surprise litigation. Related Terms Deed · Commercial Real Estate Purchase Agreement · Easement · Restrictive Covenant · Lis Pendens · Earnest Money Title VII (Civil Rights Act of 1964) § The principal federal employment discrimination statute, codified at 42 U.S.C. § 2000e et seq. Prohibits employment discrimination based on race, color, religion, sex (including pregnancy and, post-Bostock, sexual orientation/gender identity), and national origin. Applies to employers with 15+ employees. Damages include back pay, compensatory and punitive damages capped by employer size ($50K-$300K), and attorney's fees. Texas state-law parallel: TCHRA (Tex. Lab. Code Ch. 21). Title VII of the Civil Rights Act of 1964 is the principal federal employment discrimination statute, prohibiting employment discrimination based on race, color, religion, sex, or national origin. Title VII transformed American employment law by prohibiting widespread discriminatory practices that previously characterized U.S. workplaces. The statute applies to employers with 15 or more employees and provides administrative exhaustion, federal-court litigation, and capped damages. Major amendments: Pregnancy Discrimination Act (1978), Civil Rights Act of 1991 (compensatory and punitive damages with caps), and judicial extension to LGBT employees through Bostock v. Clayton County , 590 U.S. 644 (2020). Authority Federal statute: 42 U.S.C. § 2000e et seq. (Title VII). Coverage: § 2000e(b) (15+ employees). Damages framework: 42 U.S.C. § 1981a (Civil Rights Act of 1991). Pregnancy Discrimination Act: § 2000e(k) . EEOC regulations: 29 C.F.R. Part 1601 . Foundational cases: McDonnell Douglas Corp. v. Green , 411 U.S. 792 (1973) (burden-shifting); Meritor Savings Bank v. Vinson , 477 U.S. 57 (1986) (sexual harassment); Burlington Industries v. Ellerth , 524 U.S. 742 (1998) and Faragher v. City of Boca Raton , 524 U.S. 775 (1998) (employer harassment liability); Bostock v. Clayton County , 590 U.S. 644 (2020) (sexual orientation, gender identity); Muldrow v. City of St. Louis , 601 U.S. 346 (2024) (no heightened harm requirement for transfer discrimination); Groff v. DeJoy , 600 U.S. 447 (2023) (religious accommodation undue hardship). Protected classes Title VII protects against employment discrimination based on five protected classes: (1) race ; (2) color ; (3) religion ; (4) sex , including pregnancy and related conditions per the Pregnancy Discrimination Act, and per Bostock (2020) sexual orientation and gender identity; (5) national origin . Section 1981 (42 U.S.C. § 1981) parallels Title VII for race claims with broader coverage (no employer-size threshold, no damages caps) but more limited scope. Title VII covers hiring, firing, promotion, compensation, terms and conditions of employment, and prohibits both discrimination and retaliation for protected activity. The McDonnell Douglas framework McDonnell Douglas v. Green (1973) established the burden-shifting framework for Title VII disparate-treatment claims when direct evidence is lacking: (1) plaintiff prima facie case , protected class membership; qualified for position; adverse employment action; circumstances giving rise to inference of discrimination; (2) employer rebuttal , articulate legitimate, non-discriminatory reason; (3) plaintiff pretext , show employer's reason is pretext for discrimination. Burden of persuasion remains with plaintiff throughout. Muldrow v. City of St. Louis (2024) clarified that "adverse employment action" requires only "some harm," not "significant" harm, broadening Title VII's reach to lateral transfers and similar actions. Disparate impact Title VII also addresses disparate impact, facially neutral practices with disproportionate adverse effect on protected classes. Plaintiff must (1) identify specific employment practice; (2) show statistical disparate impact; (3) defeat employer's "job related and consistent with business necessity" defense. Employer alternative: less discriminatory alternative exists. Common targets: testing requirements, height/weight standards, criminal-record screens, credit checks. Disparate-impact theory is heavily used in EEOC enforcement and class actions. Sexual harassment Sexual harassment is actionable as sex discrimination. Two principal forms: (1) quid pro quo , adverse employment action conditioned on sexual conduct; (2) hostile work environment , severe or pervasive sex-based harassment. Faragher and Ellerth (1998) established employer liability framework: strict liability for tangible adverse action by supervisor; affirmative defense available where no tangible action, employer exercised reasonable care to prevent and correct, employee unreasonably failed to take advantage of preventive opportunities. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA, 2022) invalidates pre-dispute arbitration of sexual harassment claims at employee election. Religious accommodation, post-Groff Groff v. DeJoy , 600 U.S. 447 (2023), substantially raised the religious accommodation undue-hardship standard. Pre-Groff, TWA v. Hardison (1977) had been read to permit denial when accommodation imposed "more than de minimis" cost. Groff requires employers to show that accommodation would result in "substantial increased costs", a meaningfully higher bar. Post-Groff, religious-accommodation refusals require more substantial justification. Common accommodations: schedule modifications for Sabbath observance, dress and grooming exceptions, prayer-time accommodations, dietary accommodations. Bostock and LGBT protections Bostock v. Clayton County , 590 U.S. 644 (2020), held that Title VII's prohibition on sex discrimination protects sexual orientation and gender identity, the textual reasoning being that firing someone for being gay or transgender necessarily considers sex. The decision resolved a long circuit split and extended Title VII protection to LGBT employees not previously covered. Post-Bostock issues: religious-employer exemptions; coordination with state laws; reasonable accommodation of transgender employees; bathroom/dress-code policies; coordination with EEOC enforcement guidance. Damages structure Title VII damages (post-1991): (1) back pay ; (2) front pay or reinstatement ; (3) compensatory damages for emotional distress and other non-economic harm; (4) punitive damages for malicious or reckless violations; (5) attorney's fees and costs . Compensatory and punitive damages combined are capped by employer size: $50K (15-100 employees); $100K (101-200); $200K (201-500); $300K (500+). Back pay, front pay, and equitable relief are not subject to caps. Damages caps are a principal limitation relative to some state-law alternatives. Administrative exhaustion Title VII requires administrative exhaustion through EEOC before federal-court suit: (1) charge filing deadline , 180 days standard, 300 days in Texas (deferral state via TWC-CRD work-share); (2) EEOC investigation ; (3) right-to-sue letter ; (4) 90-day federal-suit deadline from right-to-sue letter receipt. Fort Bend County v. Davis , 587 U.S. 541 (2019), held that exhaustion is non-jurisdictional but mandatory, meaning failure to exhaust can be waived but if timely raised will bar the claim. Strict deadline calendaring is essential. Practical context For Texas employers, Title VII compliance is foundational. Best practice: (1) maintain comprehensive anti-discrimination and anti-harassment policies covering all Title VII-protected classes (including post-Bostock sexual orientation and gender identity); (2) train regularly on harassment prevention and discrimination avoidance; (3) maintain effective complaint procedures with multiple reporting channels; (4) investigate complaints promptly with documented response; (5) document non-discriminatory business reasons for adverse employment actions; (6) post-Groff, evaluate religious accommodation requests with substantial-cost analysis rather than de-minimis dismissal; (7) coordinate Title VII with TCHRA (largely parallel) and ADA/ADEA. For employees: (1) document discriminatory comments and patterns contemporaneously; (2) use internal complaint procedures (preserves Faragher/Ellerth issues); (3) calendar 300-day EEOC charge deadline; (4) calendar 90-day federal-suit deadline strictly; (5) coordinate dual-filing with TWC-CRD for TCHRA claims. Common pitfall: employers without effective complaint procedures lose Faragher/Ellerth defense, exposing them to vicarious liability for non-tangible-action harassment. Companion article: Before Firing an Employee Related Terms Age Discrimination in Employment Act · Americans with Disabilities Act · Texas Commission on Human Rights Act · EEOC Charge · Workplace Discrimination Tortious Interference § A tort claim arising from a third party's wrongful interference with the plaintiff's contractual or prospective business relationships. Texas recognizes two distinct claims: tortious interference with existing contracts (ACS Investors v. McLaughlin, 943 S.W.2d 426 (Tex. 1997)) and tortious interference with prospective business relations (Wal-Mart Stores v. Sturges, 52 S.W.3d 711 (Tex. 2001)). Each has specific elements; the prospective-relations tort is narrower, requiring independent tortious or unlawful conduct. Tortious interference is a tort claim arising from a third party's wrongful interference with the plaintiff's contractual or prospective business relationships. Texas recognizes two distinct tortious-interference claims: interference with existing contracts (sometimes called "interference with contract") and interference with prospective business relations . The two claims have different elements and require different proof; the prospective-relations claim is substantially narrower, requiring independently tortious or unlawful conduct rather than mere interference. Authority Tortious interference with existing contract: ACS Investors, Inc. v. McLaughlin , 943 S.W.2d 426 (Tex. 1997); Holloway v. Skinner , 898 S.W.2d 793 (Tex. 1995). Tortious interference with prospective business relations: Wal-Mart Stores, Inc. v. Sturges , 52 S.W.3d 711 (Tex. 2001) (foundational case requiring independently tortious conduct); Coinmach Corp. v. Aspenwood Apartment Corp. , 417 S.W.3d 909 (Tex. 2013). Justification defense: Prudential Ins. Co. v. Financial Review Servs., Inc. , 29 S.W.3d 74 (Tex. 2000). Statute of limitations (2 years): Tex. Civ. Prac. & Rem. Code § 16.003 . Tortious interference with existing contract, elements ACS Investors v. McLaughlin articulates the four elements: (1) existence of a valid contract subject to interference ; (2) willful and intentional act of interference with the contract; (3) proximate cause , the act caused the breach or non-performance; (4) actual damages . The interference must be intentional, the defendant must have knowledge of the contract and act with the intent to interfere. Negligent interference is not actionable; only intentional, willful conduct supports the claim. The justification defense Tortious interference with existing contract is subject to a justification defense. The defendant may justify interference by showing that it was acting in furtherance of a legitimate interest of greater or equal weight to the plaintiff's contractual interest. Prudential Ins. Co. v. Financial Review Servs. (Tex. 2000) is the controlling case. Common justifications: (1) colorable legal right , defendant had a legal right to take the action even if it caused interference; (2) protection of own contractual interest , defendant interfered to protect a competing contract; (3) fiduciary duty , defendant interfered as part of fiduciary obligations; (4) professional advice , attorney or financial advisor advised the breaching party. Justification is an affirmative defense; the defendant bears the burden. Tortious interference with prospective business relations, elements Wal-Mart Stores v. Sturges (Tex. 2001) substantially raised the bar for prospective-relations claims. The foundational case requires: (1) reasonable probability that the plaintiff would have entered into a business relationship with a third party; (2) independently tortious or unlawful conduct by the defendant that prevented the relationship from occurring; (3) proximate cause ; (4) actual damages . The "independently tortious or unlawful" element is the critical distinction from existing-contract interference: mere competitive interference with a prospective relationship, fair competition, is not actionable. The plaintiff must show conduct that is independently tortious (defamation, fraud, threats, intimidation) or unlawful (criminal, regulatory violation). The Sturges framework, competition vs. tortious interference Sturges rejected the older Restatement framework that asked whether interference was "improper", a vague standard that potentially captured ordinary competition. The Texas Supreme Court reasoned that aggressive competition for prospective business relationships should not be tortious; only conduct that is independently wrongful (a separate tort or unlawful act) is actionable. This makes Texas's prospective-relations tort substantially narrower than equivalent claims in some other states. Common types of conduct that satisfy Sturges : (1) fraudulent misrepresentations to the prospective customer; (2) defamation of the plaintiff; (3) intimidation or threats ; (4) antitrust violations ; (5) regulatory violations ; (6) misappropriation of trade secrets . Common factual patterns Recurring tortious-interference patterns in Texas commercial litigation: (1) employee raiding , competitor recruits employees subject to non-compete agreements; (2) customer poaching , competitor targets customers with existing contracts; (3) supply chain disruption , defendant interferes with key supplier or distributor relationships; (4) M&A interference , third party intervenes to disrupt pending acquisition; (5) regulatory complaints , competitor files baseless regulatory complaints to disrupt business operations; (6) defamation , false statements about plaintiff to plaintiff's customers or partners. Damages Tortious interference damages typically include: (1) lost profits from the interfered-with relationship; (2) consequential damages from the interference; (3) punitive damages for malicious or grossly negligent conduct (subject to Tex. Civ. Prac. & Rem. Code Ch. 41 caps); (4) disgorgement of defendant's gains in some circumstances. Damages must be proven with reasonable certainty; speculative damages do not support recovery. Lost-profits expert testimony is typically required for any meaningful damages claim. Statute of limitations Both tortious-interference variants are subject to the 2-year limitations period under § 16.003. Accrual generally occurs at the date of breach (existing contract) or at the date prospective relationship was prevented from occurring (prospective relations). The discovery rule does not generally apply unless the interference itself is concealed. Practical context For Texas commercial plaintiffs, tortious interference is a powerful tool against competitor misconduct, but the prospective-relations claim's independently-tortious requirement is a significant barrier. Best practice: (1) for existing-contract claims, identify the specific contract, the breach, and the defendant's knowledge; (2) for prospective-relations claims, identify the independently tortious or unlawful conduct first, the claim cannot survive without it; (3) document the reasonable probability of the prospective relationship through past dealing, ongoing negotiations, or other evidence; (4) prepare lost-profits evidence with expert support; (5) plead and preserve punitive-damages elements. For defendants: (1) the justification defense is powerful for existing-contract claims, develop the protected interest framework; (2) for prospective-relations claims, attack the independently-tortious element first; (3) competition defenses are strong for prospective-relations claims under Sturges . Tortious interference cases are heavily fact-driven; thorough factual development is essential. Related Terms Civil Conspiracy · Noncompete Agreement · Nonsolicitation Agreement · Trade Secret · Statute of Limitations Trade Dress § The total visual image and overall appearance of a product or its packaging that identifies the source of goods to consumers. Protectable under federal and Texas law where it is non-functional and either inherently distinctive or has acquired secondary meaning. Distinct from the underlying utility of the product; protects appearance, not function. Trade dress is the total visual image and overall appearance of a product or its packaging that identifies the source of goods to consumers. Trade dress can include shape, color combinations, textures, graphics, and the overall design of packaging or product configuration. Protectable trade dress allows businesses to protect distinctive product appearances and brand presentations beyond what trademark protection of names and logos provides. Authority Lanham Act, 15 U.S.C. § 1125(a) (false designation of origin and trade dress claims). Texas Trademark Act, Tex. Bus. & Com. Code Ch. 16 . Foundational trade dress decisions: Two Pesos, Inc. v. Taco Cabana, Inc. , 505 U.S. 763 (1992) (restaurant decor as inherently distinctive trade dress; Texas case); Wal-Mart Stores, Inc. v. Samara Brothers, Inc. , 529 U.S. 205 (2000) (product-design trade dress requires secondary meaning); TrafFix Devices, Inc. v. Marketing Displays, Inc. , 532 U.S. 23 (2001) (functionality bar). Federal registration of trade dress: 15 U.S.C. § 1052 . Two categories: packaging vs. product configuration The Supreme Court's Wal-Mart decision distinguished two trade-dress categories: packaging trade dress (the dress of the package or container) and product-configuration trade dress (the design of the product itself). Packaging trade dress can be inherently distinctive, protectable without proof of secondary meaning. Product-configuration trade dress is never inherently distinctive and always requires proof of acquired secondary meaning before protection attaches. Functionality bar Functional features cannot be protected as trade dress. TrafFix (2001) held that a feature is functional if it is essential to the use or purpose of the product, affects the cost or quality of the product, or if exclusive use of the feature would put competitors at a significant non-reputation-related disadvantage. The functionality bar prevents trade-dress law from being used to protect what should be protected (if at all) by patent law. Aesthetic functionality, features that drive consumer demand for non-source reasons, is also barred. Secondary meaning Secondary meaning exists where consumers have come to associate the trade dress with a single source. Evidence includes (1) length and exclusivity of use; (2) advertising expenditure; (3) sales volume; (4) consumer surveys; (5) intentional copying by competitors; and (6) media coverage. Consumer survey evidence is often dispositive in litigation. Two Pesos and the Texas connection Two Pesos v. Taco Cabana (1992) is a Texas-origin case that established trade-dress protection for restaurant decor under the Lanham Act. The Supreme Court affirmed a Texas jury verdict finding that Taco Cabana's restaurant interior, a combination of color schemes, mural patterns, and seating layout, was inherently distinctive trade dress and infringed by Two Pesos's similar restaurants. Practical context Trade-dress protection becomes valuable at scale, when imitators begin to copy a successful product or service presentation. For Texas businesses developing distinctive product designs, packaging, or service environments, federal registration on the Principal Register provides the strongest protection. Documentation of consumer association, surveys, brand recognition studies, advertising spend, should be developed before litigation arises, not after, when retrospective evidence is harder to gather and more easily challenged. Related Terms Trademark · Service Mark · Patent · Injunctive Relief Trade Secret § Information, including formulas, methods, processes, customer lists, financial data, that derives independent economic value from not being generally known and is the subject of reasonable efforts to maintain secrecy. A primary alternative to noncompete agreements for protecting employer competitive interests. A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that derives independent economic value from not being generally known and is the subject of reasonable efforts to maintain its secrecy. Trade secret protection is a primary alternative to noncompete agreements for protecting employer competitive interests. Authority Texas Uniform Trade Secrets Act (TUTSA), Tex. Civ. Prac. & Rem. Code Ch. 134A : § 134A.002 (definitions); § 134A.003 (injunctive relief); § 134A.004 (damages); § 134A.005 (attorney's fees); § 134A.006 (preservation of secrecy in litigation). Federal Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1836 et seq. Elements of a trade secret Under § 134A.002(6) , the information must (1) derive independent economic value, actual or potential, from not being generally known to or readily ascertainable by other persons who can obtain economic value from its disclosure or use; and (2) be the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Reasonable efforts to maintain secrecy Reasonable measures typically include (1) marking documents confidential; (2) limiting access on a need-to-know basis; (3) requiring employees and contractors to sign confidentiality agreements; (4) using physical and electronic security; (5) training employees on confidentiality obligations; (6) exit interviews emphasizing continuing obligations. Misappropriation Misappropriation occurs through (a) acquisition by improper means; or (b) disclosure or use without consent by a person who used improper means or knew the information was a trade secret. § 134A.002(3) . Improper means include theft, bribery, breach of confidentiality obligations, and electronic intrusion. Remedies Injunctive relief preventing further use or disclosure; damages for actual loss and unjust enrichment (or in lieu, a reasonable royalty); exemplary damages up to twice compensatory damages for willful and malicious misappropriation; attorney's fees in cases of willful misappropriation or bad faith. Practical context Trade secret protection is a powerful complement (or alternative) to noncompete agreements. Where noncompete enforcement is uncertain, for healthcare practitioners under SB 1318, for example, robust trade secret protection through confidentiality agreements, IT controls, and exit procedures preserves competitive position regardless of restrictive-covenant enforceability. Related Terms Confidentiality Agreement · Noncompete Agreement · Nonsolicitation Agreement · Employment Agreement Trademark § 2024 A word, name, symbol, or device used to identify and distinguish goods of one source from those of others. Protected under the federal Lanham Act and the Texas Trademark Act, plus common-law rights from actual use. Strength turns on distinctiveness; protection scope on likelihood of confusion. A trademark is a word, name, symbol, device, or any combination used by a person to identify and distinguish that person's goods from goods sold by others, and to indicate the source of the goods. Trademark protection arises from actual use of the mark in commerce; federal registration with the USPTO provides nationwide constructive notice, presumptive validity, and procedural advantages but is not the source of trademark rights. Texas common-law trademark rights exist independent of registration. Authority Lanham Act, 15 U.S.C. § 1051 et seq.: § 1052 (refusal of registration; names clause at § 1052(c)); § 1057 (effect of registration); § 1114 (infringement of registered marks; remedies); § 1125 (false designation of origin, dilution, cybersquatting). Texas Trademark Act, Tex. Bus. & Com. Code Ch. 16 : § 16.001 (definitions); § 16.102 (infringement); § 16.103 (dilution); § 16.107 (common-law rights preserved). Recent Supreme Court authority: Vidal v. Elster , 602 U.S. 286 (2024) (names clause constitutional); Jack Daniel's Properties, Inc. v. VIP Products LLC , 599 U.S. 140 (2023) (Rogers v. Grimaldi limit when mark used as source identifier). The distinctiveness spectrum Trademark strength is a function of distinctiveness, ranked along the Abercrombie spectrum ( Abercrombie & Fitch Co. v. Hunting World, Inc. , 537 F.2d 4 (2d Cir. 1976)): (1) fanciful (coined terms, "Kodak," "Exxon") and arbitrary ("Apple" for computers) marks are inherently distinctive and protected immediately; (2) suggestive marks (suggesting a quality without describing it, "Coppertone") are inherently distinctive; (3) descriptive marks (describing the goods, "Cold and Creamy" for ice cream) are protectable only on proof of acquired distinctiveness (secondary meaning); (4) generic terms (the common name for the product itself) are never protectable. Likelihood of confusion Trademark infringement turns on likelihood of consumer confusion as to source, sponsorship, or affiliation. The Fifth Circuit applies the Roto-Rooter factors, (1) strength of the mark; (2) similarity of the marks; (3) similarity of products or services; (4) identity of retail outlets and purchasers; (5) identity of advertising media; (6) defendant's intent; (7) evidence of actual confusion; (8) degree of care exercised by purchasers, none individually dispositive. The Fifth Circuit added that no single factor is dispositive in Smack Apparel Co. v. Bd. of Supervisors of La. State Univ. , 550 F.3d 465 (5th Cir. 2008). Dilution of famous marks Dilution protects famous marks against unauthorized uses that blur or tarnish the mark's distinctiveness, even absent likelihood of confusion. Federal dilution claims arise under 15 U.S.C. § 1125(c) ; Texas claims under Tex. Bus. & Com. Code § 16.103 . Both statutes require proof of fame, defined as widespread recognition by the general consuming public (federal) or in Texas (state). Famous-mark fame is a high bar, most marks do not qualify. Recent Supreme Court developments In Vidal v. Elster (2024), the Court unanimously upheld the Lanham Act's "names clause" ( 15 U.S.C. § 1052(c) ) prohibiting registration of marks containing the name of a living person without consent, against a First Amendment challenge. In Jack Daniel's v. VIP Products (2023), the Court limited the Rogers v. Grimaldi test that had immunized parodies and expressive works from infringement claims, when a defendant uses a mark as a source-identifier for its own goods, the ordinary likelihood-of-confusion analysis applies, not the Rogers heightened test. Practical context For Texas businesses, the practical trademark sequence is: (1) clearance search before adoption, verifying no senior conflicting marks; (2) federal application as soon as use begins (or intent-to-use application before launch); (3) actual continuous use to maintain the registration; (4) policing the mark, sending cease-and-desist letters to junior infringers; and (5) renewal at the 5-year, 10-year, and subsequent 10-year intervals. Failure to police can result in loss of distinctiveness through "genericide" (Aspirin, Cellophane, Escalator). Related Terms Service Mark · Trade Dress · Trade Secret · License Agreement · IP Assignment · Injunctive Relief True Lender § 2025 The doctrine determining which party in a bank–nonbank lending partnership is the actual lender, based on which holds the predominant economic interest; it decides whether state usury caps and licensing apply. In a bank–nonbank lending partnership, sometimes called a “rent-a-bank” arrangement, a chartered bank originates a loan and a nonbank fintech partner markets it and acquires the economic interest. Because banks may export their home-state interest rate nationwide under federal law, the structure is used to extend that preemption to the nonbank. The “true lender” question asks which party is, in substance, the actual lender. When the bank is the true lender, federal interest-rate preemption applies. When the nonbank holds the predominant economic interest, courts may treat it as the true lender, so that state usury caps and licensing requirements apply, exposing the program to penalties and potentially unenforceable loans. Courts apply a fact-intensive, totality-of-the-circumstances analysis, and no single set of factors is exclusive. The OCC's 2020 federal true-lender rule, which keyed the determination to which entity was named in the loan agreement or funded the loan, was repealed by Congress under the Congressional Review Act in 2021, and the OCC is barred from issuing a substantially similar rule. The question has returned to state law and case law, and a growing number of states have codified anti-evasion standards based on predominant economic interest. For a fintech lending through a bank partner, true-lender exposure is a live design question, not a settled one. Authority 12 U.S.C. § 85 (national bank interest-rate exportation); Congressional Review Act repeal of the OCC True Lender Rule (2021) ; state anti-evasion statutes vary by jurisdiction. Turnover Order § A post-judgment court order compelling the judgment debtor to turn over non-exempt property to a sheriff, constable, or receiver for application against the judgment. Texas turnover is governed by Tex. Civ. Prac. & Rem. Code § 31.002 and is the principal remedy for reaching property that cannot be reached by ordinary execution, closely-held business interests, intangible assets, foreign-located assets, and accounts not in the debtor's possession. A turnover order is a post-judgment court order compelling the judgment debtor to turn over non-exempt property to a sheriff, constable, or court-appointed receiver for application against the judgment. Texas turnover is governed by Section 31.002 of the Civil Practice and Remedies Code. The remedy is most useful for reaching property that cannot be reached by ordinary execution, closely-held business interests, intangible assets, foreign-located assets, accounts at non-resident financial institutions, and other assets where ordinary execution mechanisms are ineffective. Authority Texas turnover statute: Tex. Civ. Prac. & Rem. Code § 31.002 (collection of judgment through court proceedings). Receiver appointment: § 31.002(b)(3) ; Tex. Civ. Prac. & Rem. Code Ch. 64 (receivers generally). Property exemptions: Tex. Prop. Code Ch. 42 (personal property); Ch. 41 (homestead). Foundational case: Beaumont Bank, N.A. v. Buller , 806 S.W.2d 223 (Tex. 1991) (turnover scope and procedure). Recent applications: Black v. Shor , 443 S.W.3d 154 (Tex. App.-Corpus Christi 2013, no pet.) (turnover limited to debtor's property, not third-party property). The turnover statutory framework Section 31.002 authorizes a court to order a judgment debtor to turn over property that: (1) cannot readily be attached or levied on by ordinary legal process; and (2) is not exempt from attachment, execution, or seizure for the satisfaction of liabilities. The order may direct the debtor to turn over the property to a sheriff or constable for execution sale, or to a court-appointed receiver for management and disposition. The court may also enjoin the debtor from transferring, encumbering, or otherwise disposing of the property pending turnover. Categories of turnover-suitable property Property typically reachable through turnover that ordinary execution cannot reach: (1) closely-held business interests , stock in private corporations, LLC membership interests, partnership interests; (2) accounts receivable , though typically reached through garnishment first; (3) intellectual property , patents, trademarks, copyrights; (4) litigation rights , claims and choses in action; (5) foreign-located assets , assets outside Texas where execution is procedurally complex; (6) cryptocurrency and digital assets ; (7) cash and securities at non-resident institutions ; (8) future income streams , royalties, contractual receivables. Turnover receiverships The court-appointed receiver is the principal turnover mechanism for complex assets, particularly closely-held business interests and intangibles. The receiver's powers typically include: (1) taking possession of the asset; (2) operating or managing the asset to preserve value; (3) selling the asset in commercially reasonable manner; (4) collecting income from the asset; (5) instituting legal proceedings to enforce rights related to the asset. Receivers are typically attorneys or commercial-collection professionals; their fees and expenses are paid from the asset's value or by the judgment debtor under the court's order. Property exemptions limiting turnover Section 31.002 expressly excludes exempt property from turnover. Texas exempt property under Property Code Chapter 42 includes: (1) up to $50,000 (single) or $100,000 (family) of personal property , household furnishings, food, clothing, jewelry, vehicles up to specified values, tools of the trade, livestock; (2) retirement accounts , qualified retirement plans, IRAs, 403(b)s; (3) professionally prescribed health aids ; (4) certain insurance benefits . Homestead under Chapter 41 is also exempt. The debtor must claim exemptions; the burden is on the debtor to identify property as exempt. Turnover vs. other collection tools Turnover is one of several Texas post-judgment collection tools: (1) execution , sheriff or constable seizes tangible personal property under writ of execution; works for ordinary tangible assets; (2) garnishment , reaches debtor's property held by third parties (banks, customers); works for cash and accounts receivable; (3) turnover , reaches non-exempt property not subject to ordinary execution; works for intangibles, foreign assets, business interests; (4) receivership , court-appointed manager takes control of assets for liquidation; works for complex assets requiring active management. Sophisticated collection campaigns typically combine multiple tools targeting different asset categories. Disclosure orders supporting turnover Section 31.002(b)(2) authorizes courts to compel the judgment debtor to disclose information about non-exempt property, supporting the underlying turnover application. Texas Rule of Civil Procedure 621a similarly authorizes post-judgment discovery of debtor assets through interrogatories, document requests, depositions, and subpoenas duces tecum. Asset-discovery practice typically precedes turnover application, the creditor first identifies what property exists, then targets specific assets through turnover orders. Practical context For Texas judgment creditors, turnover is the principal mechanism for reaching the assets of sophisticated debtors who structure holdings to evade ordinary execution. Best practice: (1) initiate post-judgment asset discovery promptly upon judgment; (2) identify business interests, intellectual property, and intangible assets that ordinary execution cannot reach; (3) prepare turnover application with specific identification of target property and proposed receiver; (4) consider receivership for assets requiring active management; (5) coordinate turnover with garnishment and execution to attack the full asset portfolio. For judgment debtors, the appropriate response is (1) careful pre-judgment exemption planning (consistent with not committing fraudulent transfer); (2) accurate and complete responses to asset discovery (failure to respond can produce sanctions and adverse inferences); (3) opposition to overbroad receivership requests; (4) coordination with bankruptcy or settlement strategy. Aggressive turnover campaigns often produce settlements at substantial discounts to underlying judgment value. Related Terms Garnishment · Post-Judgment Interest · Supersedeas Bond · Workout and Restructuring U Unemployment Compensation § Federally-coordinated state-administered insurance program providing partial wage replacement to workers who are unemployed through no fault of their own and able and available for work. Texas program codified at Tex. Lab. Code § 201.001 et seq.; administered by Texas Workforce Commission. Eligibility: monetary qualification; not disqualified by misconduct, voluntary quit without good cause, etc.; able, available, actively seeking work. Standard duration up to 26 weeks plus federal extensions in recessions. Unemployment Compensation is a federally-coordinated state-administered insurance program providing partial wage replacement to workers who are unemployed through no fault of their own and able and available for work. The program is funded through employer payroll taxes (federal and state), with benefits paid to qualifying claimants. Texas's program is codified at Tex. Lab. Code § 201.001 et seq. and administered by the Texas Workforce Commission. Unemployment benefits are time-limited (typically up to 26 weeks plus federal extensions in recessions) and partial. Eligibility involves monetary qualification, separation qualification, and ongoing requirements. Authority Federal framework: 26 U.S.C. § 3301 et seq. (Federal Unemployment Tax Act); 42 U.S.C. § 501 et seq. Texas statute: Tex. Lab. Code §§ 201.001-220.005 . Eligibility: § 207.001 et seq. Disqualification: §§ 207.041-207.049 . Appeals: §§ 212.001-212.211 . Federal-state coordination: experience-rating system requires state UI tax structures. Eligibility framework Texas UI eligibility has three principal components: (1) monetary qualification , sufficient earnings during base period (first four of last five completed calendar quarters before claim); (2) separation qualification , separation must not have been disqualifying (misconduct, voluntary quit without good cause, refusal of suitable work, labor dispute); (3) ongoing requirements , claimant must be totally or partially unemployed, able to work, available for work, actively seeking work, registered for work search. Benefit amount and duration Texas UI benefit: (1) weekly benefit amount , typically 1/25th of highest-quarter base-period wages; subject to minimum and maximum caps; (2) maximum benefit , varies by year based on Texas average wage; (3) maximum total benefits , typically up to 26 times weekly benefit amount, or 27% of total base-period wages; (4) partial benefits for claimants with reduced earnings. Standard UI is 26 weeks; federal extensions in recessions can add additional weeks (CARES Act provided substantial pandemic-era extensions through PUA and PEUC). Disqualification, misconduct "Misconduct connected with work" disqualifies claimants. Texas defines misconduct as "mismanagement of a position of employment by action or inaction, neglect that places in jeopardy the lives or property of others, intentional wrongdoing or malfeasance, intentional violation of a law, or violation of a policy or rule adopted to ensure orderly work and the safety of employees." Common examples: theft, fraud, insubordination, tardiness/absenteeism after warning, safety violations, policy violations after warning. Distinction from poor performance: misconduct requires fault and willfulness; mere inability to perform satisfactorily is not typically misconduct. Burden of proof: employer bears burden. Disqualification, voluntary quit Voluntary quit without "good cause connected with work" disqualifies claimants. "Good cause connected with work" includes: safety hazards; employer's failure to pay; significant change in work conditions; illegal demands; harassment or discrimination; medical reasons; spousal job-related relocation. Personal reasons not connected with work, caregiving needs, dissatisfaction without specific work-related justification, lifestyle preferences, generally do not constitute good cause. The appeals process Texas UI appeals: (1) initial determination , TWC deputy decision; (2) appeal tribunal hearing , telephone or in-person; sworn testimony, evidence, witnesses; (3) full Commission review , three-member Commission reviews record; (4) judicial review , Commission decision can be appealed to Texas state district court (limited record-based review). Most appeals resolved at tribunal level. Employer participation substantially affects outcomes. Employer experience rating Texas UI tax rates use experience rating: (1) new employer rate , applied initially; varies by industry; (2) experience rate , calculated from claim history after sufficient experience period; (3) chargebacks , paid UI benefits charged back to former employer's account; (4) tax rate calculation , based on chargebacks vs. taxable wages. The system gives employers direct financial incentive to manage UI claims actively. Practical context For Texas employers, UI cost management is operational. Best practice: (1) participate actively in UI claim contests where appropriate; (2) document misconduct and voluntary-quit reasons contemporaneously; (3) maintain UI claim files; (4) coordinate UI defense with discrimination defense, consistent positions reduce credibility risks; (5) consider work-share or alternative arrangements before mass layoffs. For employees: (1) understand separation reasons that disqualify; (2) provide complete information on initial application; (3) actively pursue work-search and reporting requirements; (4) appeal denials promptly; (5) coordinate UI with COBRA, severance, ACA marketplace decisions; (6) consider tax implications, UI is taxable income. Companion article: Before Firing an Employee Related Terms Texas Workforce Commission · WARN Act · Severance Agreement · Wrongful Termination · COBRA Usury § Charging interest in excess of the maximum rate authorized by law. Texas usury law applies to commercial AND consumer loans (unlike many states). The Texas Constitution sets a 10% default ceiling; Texas Finance Code Chapter 303 authorizes ceilings up to 18% for commercial loans that comply with stated requirements. Penalties for violation include forfeiture of all interest, refund of overcharges, and in some cases treble damages. Usury is the act of charging interest in excess of the maximum rate authorized by law. Unlike many states, Texas usury law applies to both consumer and commercial loans, a distinctive feature that surprises out-of-state lenders extending credit to Texas borrowers. Texas usury law is rooted in the Texas Constitution and elaborated through the Texas Finance Code; violations expose the lender to civil penalties including forfeiture of interest, double the overcharge, and in some cases treble damages plus attorney's fees. Authority Constitutional baseline: Tex. Const. art. XVI, § 11 (10% maximum interest absent legislative authorization; 6% maximum where contract is silent). Statutory framework: Tex. Fin. Code Ch. 302 (general interest provisions); § 302.001 (10% ceiling absent other law); Ch. 303 (optional rate ceilings for commercial transactions); § 303.009 (18% commercial rate ceiling, calculated weekly with 18% floor); Ch. 305 (penalties for usurious interest); Ch. 306 (commercial loans). Consumer loan ceilings: Ch. 342 . Cure provision (60-day notice for cure of usury): Tex. Fin. Code § 305.103 . Constitutional and statutory ceilings Article XVI, Section 11 of the Texas Constitution sets two baseline rates: (1) when a written agreement specifies an interest rate, the constitutional ceiling is 10% per year; (2) when the agreement is silent on interest, the rate cannot exceed 6% per year. The Constitution permits the Legislature to authorize higher rates "by law." The Legislature has done so through the Texas Finance Code, which establishes a series of category-specific ceilings substantially higher than 10%. The 18% commercial loan ceiling Section 303.009 establishes a "weekly ceiling" calculated based on a federal formula but with an absolute floor of 18%. For commercial transactions, the weekly ceiling has been at the 18% floor for many years, effectively making 18% the maximum legal interest rate for commercial loans subject to Chapter 303. The Texas Office of Consumer Credit Commissioner (OCCC) publishes the weekly ceiling in the Texas Credit Letter; lenders rely on the published rate to ensure compliance. The 18% ceiling generally applies absent specific statutory authorization for higher rates (e.g., credit cards under § 346.101). What counts as "interest" Texas usury law defines "interest" broadly to capture amounts characterized as something else but functioning as compensation for the use of money. Key inclusions and exclusions: (1) included , stated interest; loan-origination fees that exceed reasonable cost; commitment fees that are unreasonable in relation to the credit extended; default rates and late charges that exceed reasonable limits; (2) excluded , bona fide third-party costs (title insurance, escrow fees, property taxes); time-price differentials in genuine credit sales; reasonable commitment and origination fees; warrants and equity kickers when properly structured. The substance-over-form principle applies, courts look at the economic effect, not the labels. Substance over form Texas courts apply substance-over-form analysis to detect disguised loans: a transaction structured as a sale, investment, or partnership but functioning economically as a loan can be reclassified as a loan and tested against usury limits. Holley v. Watts , 629 S.W.2d 694 (Tex. 1982), is the foundational case on the sale-vs.-loan distinction. Indicators of a loan disguised as a sale: (1) repayment obligation absolute, not contingent; (2) seller's continuing operational control; (3) "buyer's" return is fixed rather than tied to underlying performance; (4) seller bears credit risk on the receivables; (5) recourse provisions favoring the "buyer." Penalties for usury Section 305 penalties depend on the nature and amount of the usury. Mild penalties: forfeiture of all interest contracted for or charged. Severe penalties (typically requiring a knowing or willful violation, or substantial usury): three times the amount of usurious interest contracted for or charged. Lenders may face attorney's fees as additional penalty. The cure provision in § 305.103 allows lenders to avoid penalties by providing the borrower a cure offer within 60 days of receiving notice of the alleged usury, refunding overcharges and corrected loan terms going forward. Savings clauses Texas usury practice relies heavily on "usury savings clauses", contract provisions stating that any interest exceeding the legal maximum is automatically reduced to the legal maximum and any overage refunded. Savings clauses are generally enforceable but not unlimited: a lender cannot contract for an obviously usurious rate (e.g., 30%) and rely on a savings clause to escape penalty. The savings clause must operate against a contract that could be performed legally; clearly contrary contracts cannot be saved. Modern Texas commercial loan documents universally include savings clauses as a defensive measure. Out-of-state lender considerations Lenders extending credit from non-Texas jurisdictions to Texas borrowers should not assume they can rely on home-state usury rules. Texas applies its usury law to loans where the contacts with Texas are sufficient; choice-of-law clauses selecting non-Texas law will be honored only when the contacts with the chosen jurisdiction are sufficient and the chosen jurisdiction has a "substantial relationship" to the transaction. Federal preemption under the National Bank Act, Federal Credit Union Act, and similar statutes may permit national banks and federally chartered institutions to "export" home-state rates to Texas borrowers; private lenders generally cannot. Practical context For Texas commercial lenders, the 18% ceiling is rarely a binding constraint for traditional bank loans, where rates are well below 18% almost regardless of credit quality. The ceiling becomes practical for: (1) mezzanine debt, all-in rates approach or exceed 18% with PIK and equity components; (2) hard-money real estate lending, short-term, high-rate loans against equity-heavy collateral; (3) merchant cash advances and factoring, although these often qualify as purchases rather than loans; (4) default-rate provisions, increased rates on default that, combined with regular interest, can exceed the ceiling. Best practice: (1) include a properly drafted usury savings clause in every commercial loan document; (2) carefully analyze all-in cost of credit (interest + fees + warrants) against the ceiling; (3) for high-rate structures, consider non-recourse-loan-with-equity-kicker treatment to extract economics outside the usury framework; (4) confirm choice-of-law analysis when out-of-state law would be more permissive. Related Terms Promissory Note · Mezzanine Financing · Factoring · Default · Guaranty Agreement V Veil-Piercing / Alter Ego § The equitable doctrine under which Texas courts disregard the limited-liability shield of a corporation or LLC and hold individual shareholders, members, or affiliates personally liable for the entity's obligations. Substantially narrowed by TBOC §§ 21.223–21.226; one of the most difficult-to-establish theories in Texas business litigation. Veil-piercing, sometimes called "piercing the corporate veil" or "alter ego" liability, is the equitable doctrine under which Texas courts disregard the limited-liability shield of a corporation or LLC and hold individual shareholders, members, owners, or affiliates personally liable for the entity's obligations. Texas has substantially narrowed the doctrine since the Texas Supreme Court's broad 1986 decision in Castleberry v. Branscum ; the current statutory framework under TBOC §§ 21.223–21.226 makes veil-piercing for contractual obligations one of the most difficult-to-establish theories in Texas business litigation. Authority Tex. Bus. Orgs. Code § 21.223 (limitation of liability); § 21.224 (exclusivity of statutory framework); § 21.225 (other statutory liability); § 21.226 (other circumstances). For LLCs: § 101.002 imports §§ 21.223–21.226 . Castleberry v. Branscum , 721 S.W.2d 270 (Tex. 1986); SSP Partners v. Gladstrong Investments (USA) Corp. , 275 S.W.3d 444 (Tex. 2008); Willis v. Donnelly , 199 S.W.3d 262 (Tex. 2006); Mancorp, Inc. v. Culpepper , 802 S.W.2d 226 (Tex. 1990). The pre-statute Castleberry framework (1986–1989) Castleberry adopted a broad equitable approach, holding that courts would "disregard the corporate fiction" when "the corporate form has been used as part of a basically unfair device to achieve an inequitable result." 721 S.W.2d at 271. Castleberry recognized six grounds, including constructive fraud, without requiring proof of actual fraudulent intent. The 1989 statutory response The Texas business community lobbied the Legislature, which substantially narrowed veil-piercing for contractual obligations. The current TBOC § 21.223 carries forward this restriction. The current statutory framework, § 21.223 General rule of nonliability ( § 21.223(a) ). A shareholder or affiliate may not be held liable to the corporation or its obligees with respect to: (1) shares (apart from the obligation to pay consideration); (2) any contractual obligation, on the basis of alter ego, actual or constructive fraud, sham to perpetrate fraud, or similar theories; or (3) any obligation on the basis of failure to observe corporate formalities. Actual fraud exception ( § 21.223(b) ). The nonliability rule does not apply when the obligee demonstrates that the holder caused the corporation to be used for the purpose of perpetrating, and did perpetrate , an actual fraud on the obligee, primarily for the direct personal benefit of the holder. Three independent elements: (a) actual fraud (not constructive); (b) use of the corporation to perpetrate the fraud; (c) primarily for direct personal benefit. Statutory preemption (§ 21.224) The TBOC framework is exclusive and preempts common-law alter-ego claims for contractual obligations. Willis v. Donnelly , 199 S.W.3d at 271–73. Application to LLCs § 101.002 imports §§ 21.223–21.226 into the LLC context. LLC members receive the same statutory protection as corporate shareholders. Single business enterprise abolished SSP Partners v. Gladstrong Investments held that the "single business enterprise" theory is not a valid Texas theory of liability. Two corporations or LLCs do not become jointly liable merely because they were operated as a single business enterprise. Tort claims and statutory liabilities § 21.223 by its terms applies to contractual obligations. Corporate agents may be held individually liable for their own tortious conduct, separate from veil-piercing. Statutory liabilities (Texas Tax Code, environmental, securities fraud) are not preempted. Failure to observe formalities is not a basis § 21.223(a)(3) expressly forecloses veil-piercing on the basis of failure to observe corporate formalities. Practical context Texas veil-piercing for contractual obligations is one of the most difficult theories in Texas business litigation. Plaintiffs commonly plead alter-ego and similar theories despite the statutory framework, but pleadings rarely survive summary judgment without specific allegations of actual fraud perpetrated through the entity primarily for the defendant's direct personal benefit. The most frequent successful applications involve owners who siphoned corporate funds, used the corporation to make fraudulent representations, or transferred corporate assets to thwart known creditors. Related Terms Corporation · Limited Liability Company · Shareholder · Member Venue § The geographic location within a court system where a case may properly be heard. Subject matter jurisdiction determines whether a court system can hear a case; venue determines which specific court within that system. Texas venue rules: Tex. Civ. Prac. & Rem. Code Ch. 15. Venue is the geographic location within a court system where a case may properly be heard. While subject matter jurisdiction determines whether a court system can hear a case, venue determines which specific court within that system. Texas venue rules are codified in Tex. Civ. Prac. & Rem. Code Ch. 15 . Authority Tex. Civ. Prac. & Rem. Code Ch. 15 : § 15.002 (general venue rule); § 15.005 (venue in multiple-claim cases); § 15.011 (mandatory venue for land); § 15.020 (mandatory venue for major transactions exceeding $1 million); §§ 15.031–15.039 (mandatory venue for specific categories); §§ 15.061–15.063 (permissive venue). Federal venue: 28 U.S.C. §§ 1391–1407 . General venue rule (§ 15.002) Absent a specific mandatory venue provision, suit may be brought in: (1) the county where all or a substantial part of the events occurred; (2) the county of the defendant's residence (for individual defendants); (3) the county of the defendant's principal office (for entity defendants); or (4) the county of the plaintiff's residence (for cases against non-resident defendants). Mandatory venue (§§ 15.011–15.020) Specific categories of cases must be brought in specific counties: actions involving real property in the county where the property is located ( § 15.011 ); breach-of-warranty claims; injuries to person or property in the county where injury occurred. For "major transactions" with consideration exceeding $1 million, parties may by contract designate any Texas county as the mandatory venue ( § 15.020 ). Transfer and motion to change venue A party may move to transfer venue under TRCP 86–87 , supported by affidavits. Improper-venue motions must be filed in the defendant's first responsive pleading or are waived. Practical context Venue selection affects forum-shopping considerations, jury composition, judicial-decision tendencies, and the convenience of parties and witnesses. The § 15.020 mandatory-venue provision for major transactions is heavily used in commercial contracts to lock down forum. Related Terms Personal Jurisdiction · Subject Matter Jurisdiction · Choice of Law / Choice of Forum Voting § 2025 The mechanism by which shareholders or directors of a Texas corporation make decisions binding on the corporation. Shareholder voting governs election of directors and certain fundamental transactions; director voting governs ordinary management decisions. Voting is the mechanism by which shareholders or directors of a Texas corporation make decisions binding on the corporation. Shareholder voting governs election of directors and certain fundamental corporate transactions; director voting governs ordinary management decisions. Authority Tex. Bus. Orgs. Code Subchapter H of Chapter 21: § 21.359 (election of directors); § 21.363 (matters other than directors); § 21.364 (fundamental actions); § 21.366 (number of votes per share); § 21.367 (voting in person or by proxy). For directors: §§ 21.415–21.418 . Default voting rules Election of directors ( § 21.359 ): the candidates receiving the highest number of votes cast by shareholders entitled to vote in the election are elected, up to the number of directors to be elected (plurality voting). Other shareholder matters ( § 21.363 ): the affirmative vote of the holders of a majority of the shares entitled to vote on, and that voted for or against, the matter is the act of the shareholders, unless a different threshold is required by the certificate, the bylaws, or the TBOC. Fundamental actions ( § 21.364 ): mergers, conversions, sales of substantially all assets, and certificate amendments require the affirmative vote of two-thirds of the outstanding shares entitled to vote, unless the certificate provides for a different threshold (which may be as low as a majority). Number of votes Each outstanding share is entitled to one vote on each matter submitted to a vote at a shareholders' meeting unless the certificate provides otherwise. § 21.366 . Class voting and SB 29 Under § 21.364(d)(1) , as amended by SB 29 effective May 14, 2025, Texas corporations may waive separate class or series voting in their certificates of formation, including in connection with fundamental actions. See Class Voting . Related Terms Shareholder · Director · Quorum · Cumulative Voting · Class Voting / Series Voting · Proxy W Wage Claim § A sworn statement filed with the Texas Workforce Commission by an employee seeking recovery of unpaid wages under the Texas Payday Law. Administrative alternative to a private civil lawsuit, with no filing fees and TWC investigation and collection assistance. A wage claim is a sworn statement filed with the Texas Workforce Commission by an employee seeking recovery of unpaid wages under the Texas Payday Law. The TWC wage-claim process is an administrative alternative to a private civil lawsuit, available without filing fees and with TWC investigation and collection assistance. Authority Tex. Lab. Code §§ 61.051–61.067 (wage claim procedure); § 61.052 (preliminary wage determination); § 61.054 (commission review); § 61.060 (judicial review); § 61.067 (reciprocal collection); §§ 61.081–61.085 (administrative lien). Filing requirements Under § 61.051 , a wage claim must be (1) in writing on a TWC-prescribed form; (2) verified (signed under penalty of perjury); and (3) filed within 180 days after the date the wages became due. The 180-day deadline is jurisdictional, claims filed later are barred from the TWC process (though private civil claims may survive under longer limitations periods). TWC procedure On receipt, TWC notifies the employer and requests a response within 14 days. § 61.052 . After investigation, TWC issues a Preliminary Wage Determination Order, either dismissing the claim or ordering payment. Both parties may appeal to the Commission and then to district court for judicial review. Remedies Order to pay unpaid wages plus, where the failure was willful, treble damages under § 61.0031 . TWC may file an administrative lien under § 61.081 to secure collection. Criminal penalties under § 61.019 are available in extreme cases of willful nonpayment with intent to defraud. Alternatives An employee may instead pursue: (1) a private civil suit for breach of contract or unjust enrichment (longer limitations period; no treble damages absent contract); (2) an FLSA claim with the U.S. Department of Labor for minimum wage or overtime violations (two-year statute of limitations, three years for willful violations); (3) if the employer is in bankruptcy, a proof of claim in the bankruptcy court. Practical context TWC wage claims are the most common enforcement mechanism for unpaid-wage disputes in Texas, fast, no filing fees, and administered by an agency with collection authority. The 180-day deadline is the principal pitfall; employees miss it routinely. Sophisticated employee-side practice considers the deadline and the option of a parallel FLSA claim where overtime or minimum-wage issues are involved. Companion article: Wage and Hour Compliance in Texas Related Terms Texas Payday Law · Final Paycheck · Fair Labor Standards Act WARN Act (Worker Adjustment and Retraining Notification) § Federal statute (29 U.S.C. §§ 2101-2109) requiring employers with 100+ employees to provide 60 days advance written notice of plant closings or mass layoffs. "Plant closing" = shutdown resulting in employment loss for 50+ employees in 30-day period. "Mass layoff" = 500+ employees, or 50-499 if 33% of active workforce. Notice to affected employees, state dislocated worker unit, local elected officials. Damages: up to 60 days back pay and benefits per employee. Texas has no state mini-WARN. The Worker Adjustment and Retraining Notification (WARN) Act is a federal statute requiring covered employers to provide 60 days advance written notice of plant closings or mass layoffs. WARN's purpose: provide workers and communities advance notice of significant job loss to facilitate transition assistance, alternative employment search, and economic adjustment. The statute applies to employers with 100 or more employees. Some states have parallel "mini-WARN" laws with broader coverage; Texas does not have a state WARN equivalent, so federal WARN is the only applicable framework for Texas employers. Authority Federal statute: 29 U.S.C. §§ 2101-2109 (Worker Adjustment and Retraining Notification Act, 1988). Coverage: 100 or more employees (excluding part-time employees who worked less than 6 months in last 12 months or work less than 20 hours per week). DOL regulations: 20 C.F.R. Part 639 . State coordination: Texas has no state mini-WARN; California (Cal-WARN), New York, Illinois, New Jersey, and others have stricter state laws. Coverage threshold WARN applies to "employers" with 100 or more employees. Coverage rules: (1) full-time employees , workers averaging more than 20 hours per week and worked at least 6 of last 12 months; (2) part-time employees , generally excluded from 100-employee count; (3) private employers (non-profit and for-profit). The "single site of employment" concept governs which group of workers the threshold applies to. "Plant closing" defined "Plant closing" means: (1) permanent or temporary shutdown ; (2) of a single site of employment , or one or more facilities or operating units within single site; (3) resulting in employment loss ; (4) for 50 or more full-time employees ; (5) during any 30-day period . "Employment loss" includes terminations, layoffs exceeding 6 months, and reductions in hours of more than 50% during 6-month period. "Mass layoff" defined "Mass layoff" means employment loss at single site of employment (other than plant closing) of: (1) 500 or more full-time employees in any 30-day period; OR (2) 50 to 499 full-time employees if those employees represent 33% or more of active workforce. Aggregation: layoffs at the same site within 90-day period are typically aggregated to determine WARN trigger. Notice requirements WARN notice requirements: (1) 60 days advance written notice before plant closing or mass layoff; (2) recipients , affected employees (or their union representative); state dislocated worker unit; chief elected official of local government; (3) specific content , name and address of employment site; whether closing or mass layoff; expected date of action; expected separation date for individual employee; bumping rights information; name and contact for further information. Exceptions to 60-day requirement WARN provides three exceptions reducing notice requirement: (1) faltering company exception , actively seeking capital; notice would have precluded obtaining it; (2) unforeseeable business circumstances , caused by sudden, dramatic, unexpected actions outside employer's control; (3) natural disaster . Exception application reduces but does not eliminate notice obligation, employer must give as much notice as practicable with brief statement of reason. Exceptions are narrowly construed. Damages and remedies WARN damages: (1) back pay , for each day of violation, up to 60 days; (2) benefits for same period including health insurance, pension contributions; (3) attorney's fees ; (4) civil penalties , up to $500 per day for failure to notify local government. Damages calculation: number of days of inadequate notice × daily wage × number of affected employees. Substantial exposure even for technically-faulty notice. WARN coordination with other obligations WARN coordinates with other employment obligations: (1) COBRA , qualifying events triggered by termination; WARN notice does not satisfy COBRA notice; (2) severance agreements , payment in lieu of notice generally satisfies WARN if structured properly; (3) collective bargaining , WARN notice to union representative satisfies notice to represented employees; (4) state UI ; (5) OWBPA waivers . Sophisticated reductions in force coordinate WARN with all related obligations. Practical context For Texas employers with 100+ employees, WARN compliance is critical for any significant reduction in force. Best practice: (1) calculate WARN trigger early; (2) provide 60-day notice when possible; (3) for unforeseen circumstances, provide as much notice as practicable with documented reason; (4) coordinate notice content carefully (specific information requirements); (5) deliver to all required recipients; (6) coordinate WARN with COBRA, severance, OWBPA waivers; (7) document business reasons to support exception arguments. For employees: (1) understand that WARN provides 60 days notice or pay in lieu; (2) check if employer's notice was adequate; (3) preserve evidence of layoff timing for potential WARN claim; (4) coordinate WARN with severance evaluation. Common pitfall: payment in lieu of notice without proper structuring can fail to satisfy WARN. Companion article: Before Firing an Employee Related Terms COBRA · Severance Agreement · Unemployment Compensation · Age Discrimination in Employment Act · Texas Workforce Commission Warranty (Express, Implied, Disclaimer) § In commercial sales, a seller's promise about the quality, condition, performance, or characteristics of goods. UCC Article 2 recognizes both express warranties (created by seller statements) and implied warranties (arising by operation of law). Both can be disclaimed with specific language. A warranty in commercial sales is a seller's promise about the quality, condition, performance, or characteristics of goods. UCC Article 2 recognizes both express warranties (created by seller statements or actions) and implied warranties (arising by operation of law). Both can be disclaimed, but disclaimer requires specific language and procedural compliance. Authority Tex. Bus. & Com. Code §§ 2.313 (express warranties); § 2.314 (implied warranty of merchantability); § 2.315 (implied warranty of fitness for particular purpose); § 2.316 (exclusion or modification of warranties); § 2.317 (cumulation and conflict). Federal Magnuson-Moss Warranty Act ( 15 U.S.C. § 2301 et seq.) applies to consumer products. Express warranty (§ 2.313) Created by (1) any affirmation of fact or promise by the seller relating to the goods that becomes part of the basis of the bargain; (2) any description of the goods that becomes part of the basis of the bargain; or (3) any sample or model that becomes part of the basis of the bargain. Use of "warrant" or "guarantee" is not required; any factual statement that influences the bargain qualifies. Implied warranty of merchantability (§ 2.314) Arises in any transaction where the seller is a merchant with respect to the goods sold. The goods must be at least: pass without objection in the trade; fit for ordinary purposes; of fair average quality within the description; adequately contained, packaged, and labeled. Most ordinary commercial goods sales include this implied warranty unless effectively disclaimed. Implied warranty of fitness for particular purpose (§ 2.315) Arises when the seller, at the time of contracting, has reason to know (1) the buyer's particular purpose for the goods, and (2) that the buyer is relying on the seller's skill or judgment to select suitable goods. Buyer must in fact rely. Disclaimer (§ 2.316) Merchantability may be disclaimed by language mentioning "merchantability", and if in writing, must be conspicuous. Fitness may be disclaimed by general written language ("there are no warranties extending beyond the description on the face hereof"), conspicuous. Both implied warranties are excluded by expressions like "as is," "with all faults," or similar language. Inspection or refusal to inspect by the buyer also excludes warranties as to defects that an examination would have revealed. Practical context Disclaimer language and conspicuousness requirements are routinely litigated. "Conspicuous" means that "a reasonable person against which it is to operate ought to have noticed it" ( § 1.201(b)(10) ), typically requires capital letters, bold, contrasting type, or larger font. Boilerplate disclaimers in non-conspicuous fine print are routinely held ineffective. Companion article: Contract Disputes in Texas Related Terms Sale of Goods · Statute of Frauds · Force Majeure Work-for-Hire Doctrine § A copyright doctrine under which the employer or commissioning party, not the actual creator, is deemed the author and copyright owner of a work. Applies automatically to works created by employees within the scope of employment, and to nine enumerated categories of commissioned works only when reduced to a signed writing. The work-for-hire doctrine is a copyright rule under which the employer or commissioning party, rather than the actual human creator, is deemed the "author" and original copyright owner of a work. The doctrine applies automatically to works created by employees within the scope of employment. For independent contractors and other non-employees, the doctrine applies only to nine narrowly enumerated categories of works, and only when the parties have signed a written work-for-hire agreement before creation. Authority Copyright Act, 17 U.S.C. § 101 (definition of "work made for hire"); § 201(b) (work-for-hire ownership rule). Controlling Supreme Court interpretation: Community for Creative Non-Violence v. Reid , 490 U.S. 730 (1989) (multi-factor test for distinguishing employees from independent contractors under the Copyright Act). For non-employee contractors, the nine enumerated categories of commissioned works that may be works for hire are listed in § 101 : contributions to collective works, audiovisual works, translations, supplementary works, compilations, instructional texts, tests, answer materials for tests, and atlases. Employee work-for-hire Under § 101 and CCNV v. Reid , a work created by an employee within the scope of employment is automatically a work for hire, no written agreement required. The "employee" determination uses common-law agency factors: (1) control over the manner and means of work; (2) source of tools and instrumentalities; (3) location of work; (4) duration of the relationship; (5) assignment of additional projects; (6) the right to assign additional projects; (7) hired party's discretion over hours; (8) method of payment; (9) hired party's role in hiring assistants; (10) whether the work is part of regular business; (11) whether the hired party is in business; (12) employee benefits; (13) tax treatment. Contractor work-for-hire, the nine categories Works created by independent contractors qualify as works for hire only if they fit one of the nine enumerated categories AND a written, signed work-for-hire agreement exists. Software, graphic design, marketing copy, and most business deliverables do not fit the nine categories. For these, the work-for-hire doctrine fails as a matter of law, and the contractor remains the copyright owner regardless of the contract language, unless a separate written copyright assignment transfers ownership. Belt-and-suspenders drafting Because the work-for-hire doctrine fails for most contractor deliverables, well-drafted contractor agreements include both (1) a work-for-hire clause designating the deliverable a work for hire to the extent legally possible; AND (2) an express present-tense copyright assignment ("Contractor hereby assigns all right, title, and interest..."). The express assignment serves as a backstop when work-for-hire fails. See IP Assignment . Termination of transfers Author-creators of works that are NOT works for hire have a statutory right to terminate copyright transfers 35-40 years after the transfer ( 17 U.S.C. § 203 ). This termination right does not exist for works for hire. The distinction matters most for works of substantial long-term economic value, where authors or their heirs may seek to recapture rights decades later. Properly characterizing a work as a work for hire forecloses this future termination risk. Practical context For Texas businesses, the most common work-for-hire failure pattern is a contractor agreement labeling deliverables (software, design, content) as "works for hire" without a backup assignment. The deliverable falls outside the nine categories, work-for-hire fails, and the contractor, sometimes a former contractor with whom the relationship has ended badly, remains the copyright owner. The fix is the belt-and-suspenders approach above. Existing contractor relationships without proper IP transfer should be addressed retroactively through a confirmatory assignment agreement. Related Terms Copyright · IP Assignment · Independent Contractor · Employment Agreement · Trade Secret Workers' Compensation § A statutorily-created insurance system providing no-fault medical and wage benefits for work-related injuries and illnesses in exchange for limiting employer liability. Texas is the only state where private-employer workers' compensation coverage is elective rather than mandatory, non-subscribing employers face common-law negligence suits without contributory negligence, fellow-servant, or assumption-of-risk defenses (Tex. Lab. Code § 406.033). Subscribing employers benefit from the exclusive-remedy bar (§ 408.001). Workers' Compensation is a statutorily-created insurance system providing no-fault medical and wage benefits for work-related injuries and illnesses, in exchange for limiting employer liability through an exclusive-remedy framework. Texas is unique among U.S. jurisdictions: private-employer workers' compensation coverage is elective , not mandatory. Texas employers can choose to subscribe to workers' comp insurance (gaining exclusive-remedy protection) or operate as "non-subscribers" (preserving common-law negligence liability but without the standard tort defenses). The choice has substantial financial and operational implications. Authority Texas Workers' Compensation Act: Tex. Lab. Code Title 5 . Coverage election: § 406.002 (coverage generally elective). Methods of obtaining coverage: § 406.003 . Notice obligations: §§ 406.004-406.005 . Common-law defenses bar for non-subscribers: § 406.033 . Exclusive remedy for subscribers: § 408.001 . Subrogation: §§ 417.001-417.003 . Foundational cases: Kroger Co. v. Keng , 23 S.W.3d 347 (Tex. 2000) (non-subscriber framework); HCBeck, Ltd. v. Rice , 284 S.W.3d 349 (Tex. 2009); Wingfoot Enterprises v. Alvarado , 111 S.W.3d 134 (Tex. 2003) (dual employment); Texas Workers' Comp. Comm'n v. Garcia , 893 S.W.2d 504 (Tex. 1995). Recent: Dunn v. East Texas Medical Center Athens (Tex. 2024) (non-subscriber proportionate responsibility under Ch. 33). The Texas elective system Section 406.002 makes Texas workers' comp coverage "generally elective" for private employers, Texas remains the only U.S. state with this opt-out structure. Employers choose between two paths: (1) subscriber , purchase workers' comp insurance through commercial carrier, self-insure (with regulatory approval), or join group self-insurance; gain exclusive-remedy protection under § 408.001; or (2) non-subscriber , decline workers' comp; preserve common-law tort framework but lose the contributory negligence, assumption-of-risk, and fellow-servant defenses under § 406.033. Public-sector employers (state, certain political subdivisions) have different coverage requirements; certain industries face mandatory coverage under specific statutes. The subscriber framework, exclusive remedy For subscribing employers, § 408.001 makes workers' comp benefits the exclusive remedy for work-related injuries: "Recovery of workers' compensation benefits is the exclusive remedy of an employee covered by workers' compensation insurance coverage or a legal beneficiary against the employer for a work-related injury sustained by the employee." Practical implications: (1) employees forgo tort suits against subscribing employers for ordinary work injuries; (2) fixed benefit schedule , medical, income (TIBs, IIBs, SIBs, LIBs, DIBs), and death benefits per statutory schedule; (3) predictable cost for employers; (4) quick benefits for employees without proving fault; (5) limited remedies , no compensatory damages for emotional distress, no punitive damages. Exceptions to exclusive remedy Several exceptions allow subscribing-employer tort suits despite exclusive remedy: (1) intentional torts , employer's intentional injury of employee; (2) gross negligence death claims , Texas Constitution Art. XVI § 26 preserves wrongful-death claim against grossly negligent subscribing employer; (3) third-party tort claims , § 417 preserves employee's claim against responsible third parties (with carrier subrogation); (4) retaliation claims , § 451.001 prohibits retaliation for filing workers' comp claim, supporting separate tort cause of action; (5) specific statutory claims not covered by exclusive remedy. Most work injury claims are channeled through workers' comp; tort claims against subscribers are narrow exceptions. The non-subscriber framework Non-subscribing employers face common-law negligence liability for work injuries, but with substantial procedural advantages for employees. Section 406.033 prohibits non-subscribers from asserting: (1) contributory negligence ; (2) assumption of risk ; (3) fellow-servant rule (negligence of co-employee). The plaintiff must still prove employer negligence (§ 406.033(d)) and damages, but without the principal common-law defenses. Pre-injury waivers of non-subscriber liability are void (§ 406.033(e)), employees cannot waive the right to sue before injury. Dunn v. East Texas Medical Center (Tex. 2024) clarified that non-subscribers can invoke proportionate responsibility under Tex. Civ. Prac. & Rem. Code Ch. 33 to allocate fault to responsible third parties. The economic calculation Many large Texas employers, particularly in retail, transportation, healthcare, operate as non-subscribers because the math favors it: (1) workers' comp premiums can be substantial for high-injury industries; (2) non-subscriber alternative plans (often called "occupational injury benefit plans" or ERISA-governed welfare plans) provide medical and wage benefits without statutory schedule constraints; (3) litigation costs for non-subscriber tort suits can be lower than expected if plans address most injuries economically; (4) large self-insured employers can absorb tort exposure as cost of doing business. Smaller employers typically subscribe, exposure to a single substantial tort verdict can be catastrophic. Benefits structure (subscribers) Texas workers' comp benefits include: (1) medical benefits , reasonable and necessary care related to compensable injury; lifetime if needed; (2) Temporary Income Benefits (TIBs) , 70-75% of average weekly wage during recovery, up to maximum weekly benefit; (3) Impairment Income Benefits (IIBs) , 70% of AWW based on impairment rating; (4) Supplemental Income Benefits (SIBs) , for serious impairment with continuing earning loss; (5) Lifetime Income Benefits (LIBs) , for catastrophic specific injuries (loss of two limbs, total blindness, severe brain injury); (6) Death Benefits , to surviving spouse/children of fatally injured worker; (7) Burial Benefits . Benefits are administered through the Division of Workers' Compensation (DWC) of the Texas Department of Insurance. Subrogation Workers' comp carriers (or self-insured subscribing employers) have subrogation rights against responsible third parties for benefits paid: (1) § 417.001 , creates the subrogation right; (2) § 417.002 , specifies recovery scope (benefits paid); (3) § 417.003 , addresses settlement and apportionment with injured worker. The carrier has "first dollar" recovery against third-party tortfeasors, typically recovers benefits paid before the worker recovers tort damages, with statutory apportionment for amounts beyond benefits. This makes workers' comp cases involving third-party negligence (auto accidents, premises liability, products liability) operationally complex; coordination with subrogation is essential. Non-subscribers do not have subrogation rights, § 417 applies only to subscribers. Retaliation under § 451.001 Texas Labor Code § 451.001 prohibits retaliation against employees for filing workers' comp claims, hiring an attorney to represent claim, instituting proceeding, or testifying in proceeding. Retaliation claims proceed in tort with damages including: (1) lost wages and benefits; (2) compensatory damages; (3) punitive damages (subject to Ch. 41 caps); (4) attorney's fees; (5) reinstatement. The retaliation cause of action operates outside the exclusive-remedy framework, it's a separate statutory tort, not a workers' comp benefit issue. Employers must structure separation decisions for injured employees carefully to avoid retaliation exposure. Practical context For Texas employers, the subscriber/non-subscriber decision is among the most consequential operational choices. Best practice: (1) evaluate the economic trade-off carefully, non-subscriber status often favors larger employers with effective safety programs and self-insurance capacity; subscriber status typically favors smaller employers; (2) for non-subscribers, implement comprehensive occupational-injury benefit plan (often ERISA-governed) addressing medical and wage benefits while preserving litigation defenses; (3) for subscribers, coordinate with workers' comp carrier on claim management, RTW programs, premium rating; (4) maintain strong safety programs regardless of status, both subscribers and non-subscribers benefit; (5) document workplace safety, hazard analysis, employee training; (6) handle injury claims promptly and professionally; (7) coordinate ADA, FMLA, and workers' comp obligations for injured employees; (8) avoid retaliation under § 451.001, decisions adverse to claim-filing employees create substantial exposure. For employees: (1) report injuries promptly; (2) understand subscriber vs. non-subscriber implications for benefits and litigation rights; (3) preserve claim and treatment documentation; (4) consult counsel for non-subscriber claims (negligence framework); (5) calendar SOL, generally 2 years for tort claims, separate framework for workers' comp benefits. Companion article: Before Firing an Employee Related Terms Subrogation · Family and Medical Leave Act · Americans with Disabilities Act · Unemployment Compensation · Wrongful Termination Working Capital Adjustment § A post-closing purchase price adjustment in M&A transactions reconciling estimated working capital at closing to actual working capital determined after closing. Mechanics: parties estimate target working capital level and closing working capital; final adjustment trues up purchase price for variance. Standard in middle-market and larger transactions to ensure buyer receives target with normalized working capital. Frequently disputed component requiring careful definition of working capital and adjustment procedures. A Working Capital Adjustment is a post-closing purchase price adjustment in M&A transactions reconciling estimated working capital at closing to actual working capital determined after closing. The mechanic: parties agree on a "target" or "peg" working capital level; estimate working capital at closing for purchase price calculation; then determine actual working capital post-closing and true up the purchase price. Working capital adjustments are standard in middle-market and larger transactions to ensure the buyer receives the target with normalized working capital, preventing seller from extracting cash through working capital manipulation pre-closing. Authority State law: governed by contract and accounting principles. Generally GAAP-based with deal-specific modifications. Foundational practice: ABA Model Stock Purchase Agreement (working capital provisions); various M&A treatises. Texas case law on adjustment disputes: typically resolved in arbitration or specialized dispute procedures rather than reported case law. Standard adjustment mechanics Typical working capital adjustment process: (1) target working capital , agreed in purchase agreement; typically based on 12-month historical average; (2) estimated closing balance sheet , seller delivers pre-closing with estimated working capital; (3) preliminary purchase price , based on estimated closing working capital vs. target; (4) final closing balance sheet , buyer prepares post-closing (typically 60-90 days); (5) review and dispute period , seller reviews; disputed items resolved through procedures; (6) final adjustment , purchase price adjusted up or down based on actual vs. estimated. Final adjustment can move purchase price meaningfully, single-digit percent typical, larger in volatile working capital businesses. Defining working capital "Working capital" definition is critical and heavily negotiated: (1) standard formula , current assets minus current liabilities; (2) excluded items , typically cash (cash-free deal); intercompany; debt-like items; tax accruals; (3) included items , accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses; (4) specific carve-outs , deal-specific items; (5) accounting principles , GAAP, consistently applied with target's historical practice (often "consistent past practice" provision). Definition precision is critical, small variations can result in millions of dollars of adjustment. Target setting Target working capital ("peg") setting approaches: (1) historical average , typically 12-month average of monthly working capital; (2) seasonal adjustment , adjusting for closing date relative to seasonal patterns; (3) ratio-based , working capital as percentage of revenue; (4) budget-based , projected working capital adjusted for actuals; (5) specific line item targets , separate targets for major components. Sophisticated deals use detailed historical analysis to set target reflecting normal operations. Common disputes Recurring working capital disputes: (1) accounting principles , buyer applies different standards than target's historical practice; (2) reserves and accruals , bad debt reserves, inventory reserves, warranty reserves often disputed; (3) cut-off issues , timing of receivables and payables around closing; (4) specific line items , interpretation of formula; (5) extraordinary items , one-time vs. recurring categorization; (6) seller manipulation , buyer alleges seller manipulated working capital pre-closing (factoring receivables, delaying payments, inventory build-up). Disputes often resolved through specialized accountant arbitrator. Dispute resolution Standard adjustment dispute procedures: (1) buyer delivers final closing statement ; (2) seller review period , typically 30-45 days; (3) notice of dispute with specific items challenged; (4) negotiation period , typically 30-60 days; (5) independent accountant arbitration , single accountant or firm as arbitrator on remaining disputes; (6) arbitrator decision , typically binding, limited review. Disputes typically address only items specifically challenged within prescribed period, undisputed items become final. Other purchase price adjustments Working capital adjustment is one of several post-closing adjustments: (1) cash adjustment , true-up of cash at closing (typically dollar-for-dollar); (2) debt adjustment , true-up of indebtedness; (3) transaction expenses adjustment , true-up of seller transaction expenses; (4) tax-related adjustments ; (5) specific identified items , asset-specific true-ups. Sophisticated transaction documents address all categories with specific definitions and adjustment procedures. Practical context For Texas M&A transactions, working capital adjustment is among the highest-impact provisions. Best practice for sellers: (1) understand target setting methodology; (2) prepare clean closing balance sheet with detailed support; (3) avoid working capital manipulation pre-closing, buyer claims and disputes follow; (4) document accounting principles consistently applied; (5) coordinate with deal financial advisor on adjustment modeling. For buyers: (1) develop comprehensive target with detailed historical analysis; (2) draft working capital definition precisely with deal-specific carve-outs; (3) negotiate dispute resolution procedures favorable to buyer; (4) prepare detailed closing balance sheet review post-closing. For both: (1) engage experienced transactional accountants, working capital provisions are technical; (2) document carefully throughout; (3) plan for dispute resolution timeline. Common pitfall: parties focusing on headline purchase price while underestimating working capital adjustment impact, sophisticated deals recognize working capital is a real economic term, not just a technicality. Companion article: Selling Your Business Related Terms Asset Purchase · Stock Purchase · Earnout · Disclosure Schedule · Representations and Warranties Insurance Workout and Restructuring § A consensual modification of a defaulted or distressed loan, reached between borrower and lender(s) without resort to foreclosure or bankruptcy. May involve forbearance agreements, loan amendments, debt-for-equity exchanges, sales of assets, or other restructuring. Distinct from formal bankruptcy reorganization but often the alternative to bankruptcy or a precursor to a structured bankruptcy filing. A workout (also called restructuring or out-of-court restructuring) is a consensual modification of a defaulted or distressed loan, reached between the borrower and lender(s) without resort to foreclosure, formal litigation, or bankruptcy. Workouts can range from simple bilateral forbearance agreements to complex multi-creditor restructurings involving debt-for-equity exchanges, asset sales, and operational turnarounds. The workout option is the alternative to formal bankruptcy proceedings, typically faster, less expensive, and less destructive of going-concern value, but lacking the binding effect of court orders that resolves holdout creditors. Authority Workouts are governed primarily by general Texas contract law modifying the original credit documents. Bankruptcy alternative: Title 11, U.S. Code (federal bankruptcy law). State-law receiverships: Tex. Civ. Prac. & Rem. Code Ch. 64 . Texas Business Court jurisdiction over restructuring disputes: Tex. Gov't Code Ch. 25A . Fraudulent transfer doctrines applicable to workout consideration: Tex. Bus. & Com. Code Ch. 24 (Texas Uniform Fraudulent Transfer Act). Federal preference law for transfers within 90 days of any subsequent bankruptcy: 11 U.S.C. § 547 . Workout categories Workouts range from simplest to most complex: (1) forbearance agreement , lender agrees not to exercise remedies for a stated period in exchange for borrower covenants and milestones; (2) amendment and waiver , lender waives existing defaults and amends loan terms going forward (covenants, payment schedule, interest rate); (3) standstill agreement , multiple creditors agree to refrain from individual enforcement while a comprehensive solution is negotiated; (4) debt restructuring , material modification of payment terms, interest rates, principal amount, or maturity; (5) debt-for-equity exchange , creditor accepts equity in lieu of all or part of the debt; (6) asset sale , sale of operating assets with proceeds applied to debt; (7) recapitalization , comprehensive restructuring of the capital stack with new equity, new debt, and existing-creditor concessions. Forbearance agreements The forbearance agreement is the most common workout instrument. Standard terms: (1) acknowledgment of existing defaults and waiver of any defenses; (2) lender agreement not to exercise remedies for a stated forbearance period (typically 30-90 days, sometimes longer); (3) borrower covenants, financial reporting, milestone deliverables, restrictions on additional debt or asset sales, fees and expenses; (4) cooperation with lender's diligence; (5) preservation of all rights upon expiration. The forbearance period is typically used to negotiate a longer-term solution (refinancing, sale, restructuring) or, alternatively, to enable the borrower to cure the underlying default. Out-of-court vs. bankruptcy The principal trade-off in choosing between out-of-court workout and bankruptcy: (1) workout advantages , faster, less expensive, less public, preserves customer/supplier relationships, avoids automatic-stay effect on operations; (2) workout disadvantages , requires unanimous or near-unanimous creditor consent (holdouts can block); cannot eliminate non-consenting creditor claims; cannot reject burdensome contracts; cannot use bankruptcy-specific tools (sec. 363 sales, sec. 1129(b) cramdown); (3) bankruptcy advantages , automatic stay; ability to bind dissenting creditors through cramdown; ability to reject burdensome contracts; ability to sell assets free and clear under § 363; tax-attribute preservation; (4) bankruptcy disadvantages , cost (often millions in professional fees); duration (6-18+ months for chapter 11); public scrutiny; operational disruption; potential customer/supplier loss; loss of control to creditors and U.S. Trustee. The decision is typically driven by (a) the breadth of creditor consent achievable; (b) the cost of bankruptcy relative to the value at stake; (c) the operational impact tolerance. Pre-packaged and pre-arranged bankruptcy Hybrid solutions combine out-of-court negotiation with brief bankruptcy proceedings: (1) pre-packaged bankruptcy , creditors solicited and vote on a plan of reorganization before filing, with the plan approved within 30-60 days of filing; (2) pre-arranged bankruptcy , major creditors agree on plan terms before filing, but soliciting and voting occur in bankruptcy. Both reduce the cost and duration of formal bankruptcy while preserving the cramdown and binding-effect features. Texas-headquartered companies can file in Texas (Northern, Eastern, Southern, or Western District) or in Delaware (where many entities are organized) or other circuit-shopped venues. State-law receivership Texas receivership under Chapter 64 of the Civil Practice and Remedies Code is an alternative to both out-of-court workout and federal bankruptcy. A receiver is appointed by court order to take possession of and manage assets pending resolution of disputes. Receiverships are most common for (1) deadlocked entities (shareholder disputes); (2) landlord-tenant or secured-creditor enforcement; (3) judgment enforcement. State-law receivership can be faster and cheaper than bankruptcy but lacks the comprehensive discharge and reorganization tools. Restructuring professionals Sophisticated restructurings typically involve specialized professionals: (1) restructuring counsel for the borrower, the senior lender, and (often) an unsecured creditors group; (2) financial advisors for the borrower, lenders, and ad hoc creditor groups; (3) chief restructuring officer (CRO) , interim executive role focused on the restructuring; (4) investment bankers for asset sales or new financing; (5) turnaround consultants for operational improvements. These engagements add cost but typically pay for themselves through better-negotiated outcomes. Practical context For Texas borrowers facing distress, the workout-vs.-bankruptcy decision frequently turns on creditor cohesion. Single-lender situations almost always begin (and often end) as workouts, bilateral forbearance and amendment can resolve most issues. Multi-creditor situations are harder; one or two holdout creditors can force the borrower into bankruptcy to bind all parties. Best practice: (1) engage restructuring counsel early, before defaults occur if possible; (2) preserve cash and avoid preference-period transfers (90-day window before any potential bankruptcy); (3) understand creditor incentive structures, what each creditor wants and how to provide it; (4) maintain credibility through transparent communication and accurate financial information; (5) develop a realistic forecast that all parties can accept as a starting point for discussions. The workout process is principally a negotiation; outcomes are driven by leverage, alternatives, and the parties' willingness to compromise. Related Terms Default · Acceleration Clause · Nonjudicial Foreclosure · Deficiency Judgment · Intercreditor Agreement · Material Adverse Change Workplace Discrimination § Adverse treatment of employees or applicants on the basis of legally-protected characteristics. Federal and Texas statutes prohibit discrimination based on race, color, national origin, religion, sex (including pregnancy and sexual orientation), age (40+), disability, and genetic information. Workplace discrimination is adverse treatment of employees or applicants on the basis of legally-protected characteristics. Federal and Texas statutes prohibit discrimination based on race, color, national origin, religion, sex (including pregnancy and sexual orientation), age (40+), disability, and genetic information. Texas employers face overlapping federal and state regulatory regimes. Authority Federal: Title VII of the Civil Rights Act of 1964 ( 42 U.S.C. § 2000e et seq.); Age Discrimination in Employment Act ( 29 U.S.C. § 621 et seq.); Americans with Disabilities Act ( 42 U.S.C. § 12101 et seq.); Pregnancy Discrimination Act; Genetic Information Nondiscrimination Act. Texas: Texas Commission on Human Rights Act, Tex. Lab. Code Ch. 21 (administered by the Texas Workforce Commission Civil Rights Division). Protected characteristics Race, color, religion, sex (including pregnancy, childbirth, and related medical conditions; under Bostock v. Clayton County (2020), sexual orientation and gender identity), national origin, age (40 and over), disability, genetic information. Texas Commission on Human Rights Act covers the same characteristics with substantially identical protections at the state level. Forms of discrimination Disparate treatment: intentional adverse action based on a protected characteristic. Disparate impact: facially-neutral policies that disproportionately affect a protected group without business justification. Harassment: unwelcome conduct based on a protected characteristic that creates a hostile work environment. Retaliation: adverse action against an employee for engaging in protected activity (filing a complaint, participating in an investigation). Coverage thresholds Title VII applies to employers with 15+ employees; ADEA applies to employers with 20+ employees; ADA applies to employers with 15+ employees; Tex. Lab. Code Ch. 21 applies to employers with 15+ employees. Procedural prerequisites Federal claims require an EEOC charge filed within 300 days of the discriminatory act (180 days where no state agency exists; 300 days in Texas due to TWC dual-filing). Texas claims require a TWC charge within 180 days. Remedies Backpay, front pay, compensatory damages, punitive damages (capped by employer size under Title VII), attorney's fees. Equitable relief (reinstatement, injunction). Practical context Most discrimination claims involve allegations of disparate treatment in hiring, promotion, compensation, or termination. Sophisticated employer practice involves documented hiring and termination decisions, consistent application of policies, prompt response to complaints, and effective training. Related Terms Wrongful Termination · At-Will Employment · Severance Agreement · Employment Agreement Wrongful Termination § A narrow Texas concept, termination of employment in violation of a specific common-law exception or statutory protection limiting the at-will rule. Texas does not recognize a generalized cause of action for wrongful discharge based on broad public-policy grounds. "Wrongful termination" in Texas is a narrow concept, termination of employment in violation of a specific common-law exception or statutory protection limiting the at-will rule. Texas does not recognize a generalized cause of action for "wrongful discharge" based on broad public-policy grounds; the available causes of action are specifically defined and require careful claim selection. Authority Sabine Pilot Service, Inc. v. Hauck , 687 S.W.2d 733 (Tex. 1985) (refusal to perform illegal act). Tex. Lab. Code § 451.001 (workers' compensation retaliation). Tex. Civ. Prac. & Rem. Code § 122.001 (jury service). Texas Whistleblower Act, Tex. Gov't Code § 554.002 (public employees only). Federal anti-discrimination statutes; FMLA, 29 U.S.C. § 2615 ; OSHA whistleblower protections; SOX whistleblower protections, 18 U.S.C. § 1514A . Recognized causes of action Sabine Pilot claim: termination because the employee refused to perform an act for which the employee would be personally criminally liable. Narrowly construed; the act must be criminal, not merely unethical or unwise. Workers' compensation retaliation: termination for filing a workers' comp claim or reporting a work-related injury. Tex. Lab. Code § 451.001 . Anti-discrimination claims: termination based on a protected characteristic under federal or Texas anti-discrimination statutes. See Workplace Discrimination . FMLA retaliation: termination for taking FMLA-protected leave (employers with 50+ employees). Whistleblower claims: federal SOX, OSHA, and other statute-specific protections. The Texas Whistleblower Act covers only public employees, not private-sector workers. Damages Vary by claim. Common categories: lost wages and benefits (back pay, front pay), emotional distress damages, punitive damages where authorized, attorney's fees under fee-shifting statutes. Practical context Texas's narrow approach to wrongful termination contrasts sharply with states recognizing a general public-policy exception. Many Texas employees who feel wrongly terminated have no legal cause of action because their grievance, perceived unfairness, bad management, personality conflicts, does not fit within a recognized statutory or common-law exception. Effective claim evaluation requires identifying which specific statutory protection or common-law exception applies, and whether the employee has the procedural prerequisites (EEOC charge, TWC charge, internal complaint) needed to proceed. Companion article: Before Firing an Employee in Texas Related Terms At-Will Employment · Workplace Discrimination · Severance Agreement · Employment Agreement Z Zoning and Land Use § The framework of municipal regulations governing the permitted uses, density, height, setback, and design of buildings on real property. In Texas, zoning is exclusively a municipal function, Texas counties have no general zoning authority. Texas cities adopt zoning under chapter-211 authority, with variances, special-use permits, and rezoning available through the Board of Adjustment and the city council. Houston is famously without a comprehensive zoning ordinance. Zoning and land use regulation is the framework of municipal regulations governing the permitted uses, density, height, setback, and design of buildings on real property. In Texas, zoning is exclusively a municipal function, Texas counties have very limited zoning authority outside extraterritorial jurisdiction (ETJ) areas. Texas municipalities adopt zoning ordinances under Chapter 211 of the Texas Local Government Code; the framework is substantially uniform across most cities, with notable local variations. Houston is famously the largest U.S. city without a comprehensive zoning ordinance, relying instead on private deed restrictions and various land-use regulations. Authority Texas municipal zoning authority: Tex. Loc. Gov't Code Ch. 211 (Municipal Zoning Authority). Key provisions: § 211.003 (powers granted to municipalities); § 211.004 (purposes); § 211.005 (districts); § 211.006 (procedures for adoption); § 211.008 (zoning commission); § 211.009 (board of adjustment); § 211.010 (judicial review). County limited authority in unincorporated areas: Tex. Loc. Gov't Code Ch. 232 (subdivision platting) and various special acts. Subdivision regulation: Tex. Loc. Gov't Code Chs. 212, 232 . Texas Local Government Code Chapter 245 protects vested rights in pending permit applications. Zoning structure Texas zoning ordinances typically organize the city into zoning districts , residential (R-1, R-2, etc.), commercial (C-1, C-2), office, industrial, agricultural, and mixed-use, with each district having permitted uses (uses allowed as of right), conditional uses (uses allowed with special permit), and prohibited uses. Other regulatory dimensions include: (1) density (units per acre, floor-area ratio); (2) height limits ; (3) setbacks (distance from lot lines); (4) parking requirements ; (5) signage restrictions ; (6) landscaping requirements ; (7) impervious cover limits . Form-based codes, regulating physical form rather than primarily use, are increasingly common in Texas downtown and transit-oriented districts. Variances and special exceptions Property owners seeking relief from strict ordinance compliance can pursue several paths: (1) variance , granted by the Board of Adjustment under § 211.009 upon showing of "unnecessary hardship" specific to the property (not a self-created hardship); (2) special exception (also called special-use permit or conditional-use permit), granted by the Board of Adjustment or city council for uses specifically authorized in the ordinance subject to conditions; (3) rezoning , legislative action by the city council to change the zoning district designation; (4) planned development , district designed for specific large project with bespoke regulations. Vested rights Chapter 245 of the Texas Local Government Code protects "vested rights" in pending permit applications and projects, a regulatory authority generally cannot apply newly-adopted regulations to a project for which an application was filed before the new regulation took effect. Vested-rights analysis is highly fact-specific and frequently contested. Property owners contemplating major developments should consider filing an early permit application to lock in current regulations even if construction will occur later. The Houston exception Houston, the fourth-largest U.S. city, does not have a comprehensive zoning ordinance, voters have rejected zoning proposals multiple times. Houston regulates land use through (1) deed restrictions enforceable by HOAs and the City; (2) the Houston Code of Ordinances regulating specific issues (parking, signage, historic preservation); (3) the Subdivision Ordinance regulating platting; (4) the Development Regulations (Chapter 42) regulating density, parking, and other standards. The result is a unique Texas regulatory pattern that produces development outcomes superficially similar to zoned cities through different mechanisms. ETJ and county limits Texas municipalities have limited regulatory authority in their extraterritorial jurisdiction (ETJ), the area within a defined distance of city limits where the city has annexation rights. ETJ regulation is much more limited than within-city zoning; counties have very limited zoning authority in unincorporated areas. The result is that large portions of unincorporated Texas have minimal zoning regulation, governed primarily by subdivision platting requirements ( Tex. Loc. Gov't Code Ch. 232 ) and private deed restrictions. Practical context For Texas commercial property buyers and developers, zoning is typically the second most important due diligence item after title (and arguably more important for properties whose value depends on a planned use). Buyers should (1) obtain a zoning verification letter from the municipality confirming current district and allowed uses; (2) review the full zoning ordinance for setback, height, density, and parking implications for planned use; (3) verify whether any pending rezoning or comprehensive plan amendments could affect the property; (4) for projects requiring variance, special exception, or rezoning, complete those processes before closing or include closing conditions tying closing to approval. The cost of failed approval after closing (a property purchased for its planned use that cannot be used as planned) is the most expensive zoning mistake. Related Terms Commercial Real Estate Purchase Agreement · Restrictive Covenant · Easement · Due Diligence · Title Insurance For Researchers Citation conventions and how to cite this glossary Statutory citations Texas Business Organizations Code citations follow the format Tex. Bus. Orgs. Code § 21.419 , with the symbol § rendered as a numbered section. Where multiple subsections are cited together, the format is § 21.218(b-2) . Case citations Case citations follow standard Texas legal citation format: case name italicized, reporter and page number, parenthetical with court and year. For example, Ritchie v. Rupe, 443 S.W.3d 856, 868 (Tex. 2014) . Citing the glossary Each entry has a stable permalink. To cite this glossary, use: Texas Business Law Glossary, Kraus Law (last visited May 7, 2026), https://www.kraus.law/glossary/#fiduciary-duty . Currency and revisions Statutory amendments through May 2026 are reflected in the corpus. Entries marked 2025 reflect content from the 2024–2026 legislative cluster. The glossary is reviewed annually and revised as Texas business law evolves. Last revised: May 7, 2026 · Next scheduled review: November 2026 Maintained by Kraus Law, Granbury, Texas --- ## Corporate Governance Attorney Texas | Board Advisory & GC Experience URL: https://kraus.law/governance/ Corporate Governance & Board Advisory I've been on the board. I've been the GC. I advise from the inside. When I advise boards, I'm drawing on years of preparing the materials, managing the meetings, and making the calls that kept companies on the right side of the line. Corporate governance isn't a specialty I studied. It's a job I've done, three times, at three companies, across two countries. In this practice area The Four Pillars Texas vs Delaware Evaluating SB 29 Opt-In SB 29 in Detail FAQs Most governance advice comes from the outside looking in There's a difference between an attorney who advises boards and an attorney who has sat on the board. Between someone who drafts governance policies and someone who has enforced them under pressure. Between theory and the experience of being the person in the room when the board asks, "What do we do now?" I've been that person. Three times. The perspective it gives me, on fiduciary duties , on risk tolerance, on how boards function versus how they're supposed to function, is something you can't get from an attorney who has only practiced from the outside. Governance capabilities Fiduciary Duty Advisory Guidance on the duties of care, loyalty, and good faith as they apply to your specific governance structure. Texas recently codified the business judgment rule in the TBOC , I advise boards on what this means in practice and how to ensure decisions are defensible. Specifically, TBOC §21.419 (added by SB 29, effective May 14, 2025) creates the rebuttable presumption that directors and officers acted in good faith, on an informed basis, and in the corporation's best interests. The protection is real but conditional, it requires a documentation discipline most boards don't have by default. I help boards build that discipline into the meeting cadence: agenda design, materials review, minute-keeping, and the contemporaneous records that establish “informed basis” if the decision is later challenged. Board Meeting Support Meeting preparation, agenda development, board packages, minutes, and the documentation that protects directors . I've prepared board materials for publicly traded companies and bring that standard of rigor to every engagement. Internal Investigations When the board needs independent counsel to investigate a complaint, a whistleblower report, or a potential compliance breach, I provide the structured, defensible process that protects the company and the directors personally. The framework is the same regardless of trigger: intake (scope the matter, identify witnesses, assess privilege); preservation (litigation hold, document collection, IT preservation); interviews (Upjohn warnings, witness sequencing, contemporaneous notes); findings (board-level report, remediation recommendations, privilege analysis for any external disclosure). When a special committee is appropriate, for matters involving senior management, controlling shareholders, or related-party transactions, I help structure the committee mandate and preserve its independence. Risk Governance Enterprise risk assessment, risk committee support, and the frameworks that help boards understand and manage their exposure. I approach risk the way a GC does, as something to manage strategically, not something to fear. Governance Framework Design For companies building governance infrastructure for the first time, whether due to growth, a capital raise , or a listing, I design the committee structures, charters, policies, and reporting frameworks from the ground up. I've done this three times. I know what works and what's just paperwork. Public Company Governance For public companies and companies preparing to go public: board independence requirements, audit and compensation committee composition, insider trading policies, disclosure controls, and the ongoing governance obligations that come with a listing. Corporate Secretary Services Outsourced corporate secretary support, meeting coordination, filing obligations, shareholder communications , and the administrative infrastructure that keeps the governance system running. I've served as corporate secretary for public companies and can provide this as a standalone service or as part of a broader GC engagement. The Scale bridge: If a governance matter escalates to litigation or regulatory investigation, Scale LLP's litigation practice, including a partner who served as a federal prosecutor in the Jack Smith investigation, provides the firepower without disrupting the advisory relationship. The Four Pillars of Texas Governance Post-SB 29 A working framework for Texas entities navigating the governance changes that took effect May 2025. Each pillar is a distinct design decision, independence, information rights, fiduciary calibration, and litigation strategy, and each pillar can be gotten right or wrong independently of the others. 1 Director independence Independence is the foundation of every governance protection. SB 29 strengthened Texas's framework for disinterested directors by codifying clearer standards for what qualifies as independence in transactions involving interested parties, drawing from Delaware's MFW pathway but applying it more broadly across Texas business entities, including LLCs and partnerships, not just corporations. For boards, this means independence is no longer a fact pattern argued after the transaction; it is a structure to design upfront. A properly constituted independent committee, with documented disinterestedness and adequate resources for separate counsel, materially changes the standard of judicial review. 2 Information rights The books and records right is the foundation of every shareholder fiduciary claim. TBOC § 21.218 as amended now codifies the "proper purpose" test for Texas entities and narrows the documents discoverable through statutory demand, ending the practice of using § 21.218 as pre-suit discovery. Directors retain broad rights, books and records to perform their duties. Shareholders get books and records to investigate suspected wrongdoing, but the proper purpose must be specific and the demand tailored. Texas now has bright-line statutory limits where Delaware has fact-driven judicial standards. 3 Fiduciary duty calibration SB 29 expanded the ability of Texas entities to modify or eliminate certain fiduciary duties through charter or operating agreement provisions. For LLCs, broad opt-outs are now permissible. For corporations, more limited opt-outs remain available, but expanded compared to pre-SB 29 doctrine. This is not a uniform recommendation. For investor-backed companies, eliminating duties of loyalty is rarely appropriate. For family-owned holding companies, narrowed duties may be the right structure. For closely-held operating businesses, calibrated duties match the actual governance structure better than the default duty-of-loyalty framework designed for widely-held public companies. 4 Derivative litigation strategy SB 29 introduced a 3% ownership threshold ( TBOC § 21.552(a)(3) ) for shareholders to bring derivative suits in Texas. Combined with the Texas Business Court's specialized commercial jurisdiction and the codified jury trial waiver under TBOC § 2.115, Texas has materially altered the strategic calculation around derivative litigation. The universe of potential plaintiffs is narrowed. The forum is more sophisticated. Bench trials replace jury trials in many disputes. For directors deciding how to respond to demand letters, the threshold question is now whether the demand is from a 3%-or-greater holder before substantive response. Texas vs Delaware, governance side by side A practical comparison across the governance dimensions most often raised by Texas entities considering jurisdiction. Texas's post-SB 29 framework is not a wholesale replacement for Delaware practice, but on several specific dimensions, the differences are material enough to drive entity choice decisions. Governance dimension Delaware Texas (post-SB 29) Business judgment rule Codified through caselaw ( Aronson , Brehm , MFW ); director conduct reviewed under business judgment unless rebutted by particularized facts. Codified under TBOC § 21.419(c); SB 29 strengthens application across entity types and tightens the rebuttal pathway. Books-and-records standard DGCL § 220, "proper purpose" required; recent narrowing in Reilly v. Aspen Group and successor cases. TBOC § 21.218, codified proper-purpose test; specific document categories enumerated; pre-suit discovery use narrowed by SB 29. Fiduciary duty modification Permitted broadly for LLCs (DGCL § 18-1101); limited for corporations except via § 102(b)(7) exculpation. SB 29 expanded modification scope for non-public LLCs and corporations through charter/operating agreement provisions. Derivative threshold No statutory ownership floor; demand requirement or futility under Rule 23.1 of the Chancery Rules. TBOC § 21.552(a)(3) imposes a 3% ownership floor for shareholders to bring derivative suits. Specialized commercial court Court of Chancery, centuries of jurisprudence; bench trials standard; deep technical expertise. Texas Business Court, operational September 2024; jurisdictional threshold $5M; bench trials standard under § 2.115. Jury trial waivers Generally enforceable for breach of contract; varies by forum and matter type. TBOC § 2.115 (SB 29) codifies validity for governance and internal-affairs disputes. Forum selection in charter Permitted post- Boilermakers ; DGCL § 115 confirmed exclusive-forum bylaws. Permitted under TBOC § 2.115 (SB 29); designation of Texas Business Court as exclusive forum increasingly common. This comparison reflects statutory provisions as of May 2026. Specific applications turn on entity-specific facts and the current state of judicial interpretation. Not legal advice. How to evaluate SB 29 opt-in decisions for your Texas entity A structured framework for boards and counsel considering whether to opt in to specific SB 29 provisions, opt out of default fiduciary duties, or retain the Texas Business Organizations Code's default framework. The right answer is entity-specific. The right process is not. 1 Identify entity type and governing documents Pull the certificate of formation, bylaws, operating agreement, and any shareholder or operating agreements. Identify whether the entity is a public company, private corporation, or LLC. SB 29's opt-in and opt-out options vary materially across entity types, and the analysis cannot begin until the current state is documented accurately. 2 Map the existing governance structure Inventory board composition, audit committee structure, related-party transaction protocols, indemnification provisions, and information rights practice. Identify where current governance differs from default Texas BOC provisions, the gap between actual practice and statutory default often points directly to where SB 29 modifications would be most useful. 3 Assess the liability risk profile honestly Is the entity an operating business with employees, customers, and creditors, where duties to multiple stakeholders matter? A holding company with predictable cashflows and a narrow stakeholder set? An investment vehicle owned by sophisticated principals who priced in the governance terms upfront? The fiduciary-duty calibration that makes sense varies materially across these profiles. 4 Consider stakeholder dynamics Founders, outside investors, employee shareholders, and family members occupy different positions and have different interests in the fiduciary framework. The right opt-in or opt-out matches the actual stakeholder structure, not a hypothetical structure designed for a different class of company. 5 Document the decision and update the governing documents Whatever the choice, opt out broadly, opt out narrowly, retain default duties, document the rationale at the board level and amend the governing documents through the proper authorization process. The reasoning matters as much as the result. A board record that reflects the analysis protects directors at the front end and defends the decision in any later review. Texas Senate Bill 29, the new floor for governance protection. On May 14, 2025, Texas signed Senate Bill 29 into law, effective immediately. SB 29 is the most consequential change to Texas corporate governance in a generation. It doesn't replace the duties of care, loyalty, and good faith that directors owe shareholders. It changes how those duties are evaluated , and who can challenge them. The codified business judgment rule (TBOC §21.419). The rule has long existed at common law; SB 29 makes it statutory. Directors and officers of covered corporations are now presumed to act in good faith, on an informed basis, in the corporation's best interests, and in compliance with governing documents. The presumption can be overcome, but only by specific evidence of fraud, intentional misconduct, ultra vires action, or knowing violation of law, with pleading at a heightened particularity standard similar to Federal Rule 9(b). Public companies are covered automatically. Private corporations must affirmatively opt in by amending their certificate of formation. This is an actual decision your board has to make, not a default. The corollary protections. SB 29 also establishes a 3% ownership threshold for derivative actions at SB 29-elected companies, narrows shareholder books-and-records inspection rights (excluding routine emails and texts unless they effectuate corporate action), and permits jury waivers and exclusive forum-selection clauses in governance documents (TBOC §§2.115 and 2.116). Companion sections cover LLCs (TBOC §101.256) and limited partnerships (TBOC §153.163). For LPs, the changes go further, a partnership agreement can now expressly eliminate fiduciary duties. What this means in practice. If your Texas corporation hasn't opted in, your directors don't have these protections. The opt-in is straightforward; the discipline of documenting board decisions to qualify for the protection is the real work. The Texas Business Court and governance disputes. The Texas Business Court , operational since September 1, 2024 (codified at Tex. Gov't Code Chapter 25A), has direct relevance for governance practice. The court has jurisdiction over derivative actions, internal entity disputes, and TBOC-based actions involving publicly traded companies regardless of dollar threshold. House Bill 40 (effective September 1, 2025) lowered the general jurisdictional threshold to $5 million for most case categories. What this means: governance-related disputes that previously moved through the regular district courts now have a specialized forum with judges experienced in business law. For corporations operating under SB 29's BJR codification, the practical effect is that BJR-related disputes are likely to be heard by judges trained to apply the rule consistently, a meaningful predictability gain over forum-shopping under the prior regime. I advise on documenting board decisions, drafting governance documents, and structuring internal proceedings with the Business Court forum in mind. What three GC tours taught me about boards. Three public-company GC tours, three different governance challenges. The two Calgary-based dual-listed energy companies (NYSE/TSX) ran on the rhythm of continuous disclosure, quarterly reporting in two jurisdictions, material change reporting under both SEC and Canadian regulators, board oversight of decisions that moved markets. The discipline there was cadence . At DIRTT Environmental Solutions (TSX: DRT) , the work was crisis governance, operating the board through the COVID-era operational reset, restructuring distribution contracts under time pressure, leading multi-million-dollar commercial litigation through to summary judgment, and supporting the board through a CEO transition. The discipline there was judgment under uncertainty . At Greenfire Resources (NYSE/TSX: GFR) , where I currently serve as Outside General Counsel and Corporate Secretary, the work has been governance framework design for a freshly public company: building board policies, equity compensation plans, and continuous-disclosure infrastructure post-listing. The discipline there is foundation . Three tours, three lessons. Boards function well when three things are true: the information flowing to directors is complete and timely, the governance structure matches the company's actual risk profile, and the GC is willing to deliver uncomfortable news without hedging. I've built that system three times. I've sat in meetings where the right answer was the one nobody wanted to hear, and I delivered it anyway. When I advise your board, I bring that same directness, drawn from real chairs, in real moments. Client Testimonial Sometimes Legal can be viewed as the 'business prevention department' — but it was the exact opposite with Chuck. He was extremely strategic, added valuable contributions across all areas of the business, and was a fantastic partner to commercial. Jennifer Warawa Former Chief Commercial Officer, DIRTT (TSX: DRT) Frequently asked questions When does a company need governance counsel? Any time the decisions being made carry personal liability for the people making them. If your company has a board, investors, regulatory obligations, or is contemplating a significant transaction, governance counsel isn't optional, it's protection. Can you serve as outside counsel to the board directly? Yes. In many engagements, I serve as counsel to the board rather than to the company, particularly in situations involving conflicts of interest, internal investigations, or transactions where the interests of management and the board may diverge. How does Texas's new business judgment rule affect my board? Senate Bill 29, signed by Governor Abbott on May 14, 2025 (effective immediately), codified the business judgment rule at TBOC §21.419 . Public companies are covered automatically; private corporations must opt in by amending their certificate of formation. The codified rule creates a rebuttable presumption that directors acted in good faith, on an informed basis, and in the corporation's best interests. The presumption can be overcome, but only by specific evidence of fraud, intentional misconduct, ultra vires action, or knowing violation of law, with pleading at a heightened particularity standard. The protection is significant but conditional: it requires a documentation discipline that most boards don't have by default. I advise on building that discipline into the meeting cadence and on the certificate-of-formation amendments needed to opt in. What's the difference between governance advisory and fractional GC? Governance advisory is focused specifically on board-level matters, fiduciary duties, meeting support, committee structure, risk oversight. Fractional GC is broader, it includes governance but also covers contracts, commercial support, compliance, and day-to-day legal operations. Many clients start with one and expand to the other. Should our Texas corporation opt in to SB 29's protections? For most Texas-domiciled corporations, yes, the protections are real, the cost is low, and the downside is minimal. The opt-in mechanism is a certificate-of-formation amendment, which requires shareholder approval but doesn't fundamentally change how the corporation operates day-to-day. What you get in return: the codified business judgment rule presumption (TBOC §21.419), the 3% ownership threshold for derivative actions, narrowed books-and-records inspection rights, and the ability to include jury waivers and exclusive forum-selection clauses in your governing documents. The two scenarios where opt-in deserves more thought are (a) corporations with sophisticated outside investors who have negotiated for specific shareholder protections that opt-in might erode, and (b) corporations contemplating institutional capital where investors typically expect Delaware-style protections. For founder-controlled and family-owned Texas corporations, the analysis usually points toward opt-in. When should our board engage independent counsel for an investigation? The general rule: any time the matter touches senior management, controlling shareholders, or related-party transactions, the board needs counsel separate from the company's regular outside counsel. The technical reason is privilege, communications between the company and its regular counsel may not protect the directors personally if interests diverge later. The practical reason is independence, the board needs advice unfiltered by the management relationship. Other triggers worth considering: whistleblower complaints alleging conduct by named officers, regulatory inquiries, transactions where management has a personal financial interest, and any matter the audit committee specifically requests be investigated independently. The earlier counsel is engaged, the more options remain available, for documentation, for privilege, for remediation. Late engagement narrows options. Related expertise Fractional General Counsel Board governance works best when your attorney knows the whole business, not just the meeting agenda. Learn more Texas Business Law TBOC fiduciary standards shape every governance decision for Texas entities. Learn more Further reading TXSE Foreign Private Issuer Listings Rule 16.312 governance framework for FPIs, board composition, audit committee independence under Exchange Act Rule 10A-3, and the home country practice accommodation. Read essay The SEC's Semi-Annual Reporting Proposal Form 10-S optional semi-annual reporting and what stays the same, Form 8-K obligations, Regulation FD, auditor review. Board-level disclosure governance implications. Read essay The Board Meeting Nobody Prepared For Practical governance for private companies, what minutes should and shouldn't capture, and why. Read essay Business Divorces in Texas When governance breaks down: shareholder oppression, derivative actions, and how to structure exits before they're forced. Read essay Your Business Partner Wants Out Buy-sell agreements, valuation disputes, and the conversations that should happen before the lawyers do. Read essay The CEO's Guide to Getting Sued First-30-days framework, what your board needs to know and document. Read essay From the Y'all Street Law podcast Brian Elliott and I cover the developing landscape of Texas business law in long-form conversation. Episodes most relevant to this practice area: Episode 11 Texas Corporate Law Overhaul SB 29 codified the business judgment rule, raised derivative-suit thresholds, and reset the Texas governance landscape. Brian and I work through what changed and which provisions are opt-in. Listen Episode 1 Texas Business Courts Launch The September 2024 launch of the specialized Texas commercial court, why it exists, what cases qualify, and how governance disputes route through it. Listen Episode 5 Business Courts Deep Dive How the Texas Business Court is operating in practice, judges, written opinions, and the developing body of Texas business law. Listen Episode 16 2026 Predictions Where the Texas governance practice is heading, derivative litigation under SB 29, more redomestications, and the Business Court hitting its stride. Listen Defined terms in this practice area Each term links to a statutorily-grounded definition in the Kraus Law glossary, with citations and Texas-specific application notes. fiduciary duties business judgment rule TBOC directors capital raise shareholder communications View the complete Texas Business Law Glossary → Your board deserves counsel that has sat in the chair. Has your lawyer done this before? Let's have that conversation. Begin a Conversation (682) 529-7177 --- ## How Can I Help? | Find the Right Attorney URL: https://kraus.law/how-can-i-help/ Start Here Not sure what you need? That's the best reason to call. Most of my client relationships start with a conversation where the business owner knows something isn't right but isn't sure what to do about it. That's exactly the kind of conversation I'm built for. Tell me what you're dealing with. "We keep calling a lawyer after things go wrong. I need someone who's ahead of the problems." Fractional GC Learn more "We have a deal, or a company, that crosses the U.S./Canada border and I need one attorney who can handle both sides." Cross-Border Learn more "Our board needs better governance, or we're forming a board and don't know where to start." Governance Learn more "I'm buying a business, selling one, raising capital, or restructuring, and I need an attorney who's done this before ." Texas Business Law Learn more "We're being sued, or we need to sue someone, and I need a litigation team now ." Litigation Learn more "I need to protect a patent, a trademark, a trade secret, or I'm not sure which one applies." Intellectual Property Learn more "I have an employee situation, a termination, a dispute, a compliance question, and I need to get this right ." Employment Learn more "I'm buying, leasing, developing, or selling commercial property and I need an attorney who knows real estate." Real Estate Learn more "We're building or integrating financial technology and I'm not sure what regulatory obligations we have." Fintech Learn more Or skip the self-diagnosis and just call. You don't need to know what kind of attorney you need before you pick up the phone. That's my job. I'll listen to what you're dealing with, figure out what it requires, and connect you with the right attorney, whether that's me or one of the 80+ attorneys at Scale LLP. One call. One relationship. No wrong door. Schedule a Call Questions about this process What if I'm not sure what kind of attorney I need? That's the best reason to call. Most of my client relationships start with a conversation where the business owner knows something isn't right but isn't sure what to call it. I'll help you figure out what you need and connect you with the right attorney, whether that's me or a colleague at Scale LLP. Does it cost anything to talk to Chuck first? No. The introductory call is free. Fifteen minutes, no obligation, no clock running. We'll figure out what you need and whether I'm the right fit, or whether one of my Scale LLP colleagues is. What if my issue spans multiple areas of law? That's one of the biggest advantages of working with me. I'm a partner at Scale LLP, a national firm with 80+ attorneys covering corporate, litigation, IP, employment, real estate, and fintech. I coordinate across practice areas so you don't have to manage multiple firms. One relationship handles everything. The right attorney is one call away. Whatever you're dealing with, I'll make sure you end up with the right person. And you'll only have to make one call to get there. Schedule a Call (682) 529-7177 Selected writing Published thinking on the practice areas the firm covers. Cross-Border Transactions: U.S./Canada Deals Read Selling Your Business in Texas: The Owner's Roadmap Read --- ## Granbury Business Attorney | Corporate & M&A Law URL: https://kraus.law/ Granbury, Texas A partner's attention. A national firm's reach. 25-year corporate attorney. Three-time public company General Counsel. Dual-licensed in the United States and Canada. Partner at Scale LLP, a national firm of 80+ attorneys. ★★★★★ 5.0 on Google · Legal 500 US Elite · Scale LLP Partner · 3 Bar Admissions Begin a Conversation Meet the Firm Chuck Kraus Partner · Scale LLP 25+ Years of Practice 3× Public Company General Counsel 2 Countries Licensed 80+ Attorneys at Scale LLP 4 State Bar Admissions The Firm Behind Your Attorney One attorney. One relationship. Eighty lawyers deep. When you work with me, you're not hiring a solo practitioner. I'm a partner at Scale LLP, and every legal need your business encounters stays inside one relationship. You One call. One number. → Chuck Your counsel. Your quarterback. → Scale LLP 80+ attorneys. 22 states. Corporate & Securities M&A, capital raises, governance, SEC compliance, de-SPAC transactions Chuck's Focus General Counsel Services Outsourced GC for companies at every stage of growth Chuck's Focus Litigation Commercial disputes, white-collar defense, investigations, arbitration Scale Network Intellectual Property Patents, trademarks, trade secrets, licensing Scale Network Real Estate & Land Use Commercial property, development, zoning Scale Network Fintech & Financial Services Regulatory, payments, blockchain, lending Scale Network Learn more about Scale LLP What I Focus On Has your lawyer done this before? i. Fractional General Counsel I've built legal departments from zero, three times. Now I build them for companies that need a GC but aren't ready for a full-time hire. Learn more ii. Cross-Border Transactions Dual-licensed in the U.S. and Canada. One attorney for both sides of the border, from de-SPAC transactions to dual-listing on the TSX and NYSE. Learn more iii. Corporate Governance & Boards I've been on the board. I've been the GC reporting to the board. I advise on fiduciary duties , risk governance, and investigations from experience, not theory. Learn more iv. Texas Business Law From formation to exit. Contracts, M&A, structuring, shareholder agreements , and the strategic counsel that turns a transaction into the right transaction. Learn more Beyond these four areas? IP, litigation, employment, real estate, fintech, I bring in a colleague from Scale LLP. Same firm. Same standards. One relationship. Client Testimonial Sometimes Legal can be viewed as the 'business prevention department' — but it was the exact opposite with Chuck. He was extremely strategic, added valuable contributions across all areas of the business, and was a fantastic partner to commercial. Jennifer Warawa Former Chief Commercial Officer, DIRTT (TSX: DRT) ★★★★★ 5.0 on Google · Read all reviews Latest Insights From the desk & the podcast. View all July 30, 2026 Business Divorces in Texas: When Partners, Shareholders, and LLCs End Badly The five trajectories of Texas business divorce litigation, the post-Ritchie v. Rupe reality of minority shareholder remedies, and the strategic… July 7, 2026 Raising Capital in Texas: SAFEs, Notes, and What Investors Want A GC who has closed de-SPACs, dual-listings, and early-stage rounds explains the three capital instruments, what each one costs, and the term… June 30, 2026 Data Breach Response: The First 72 Hours What Texas businesses are legally required to do after a data breach, notification deadlines, attorney-client privilege protection, and the… Y'all Street Law Where Texas business owners hear from the attorney who's done this. New episodes weekly. Apple Podcasts Spotify Let's talk about what you're building. A 15-minute conversation. You'll speak with Chuck directly, no intake forms, no hold music. Begin a Conversation (682) 529-7177 --- ## Indication of Value vs. Certified Appraisal URL: https://kraus.law/indication-of-value-vs-certified-appraisal/ Valuation Most owners are sold the expensive version of something they don't need yet. Two different things get called a “business valuation,” and they aren't interchangeable. One is a planning estimate. The other is a formal appraisal prepared to a professional standard. Knowing which your situation calls for can save you a few thousand dollars — or keep you from filing with a number that won't hold up. Indication of Value A planning estimate What it is A data-driven estimate of what your business is worth, run on your real financials and benchmarked against your industry. What it takes A recent tax return to start. A read in days, not weeks. Good for Planning, understanding your position, deciding whether and when to move, setting expectations before a sale. Who stands behind it A valuation engine plus an advisor's read. It is an estimate, and it says so. Certified Appraisal A formal, defensible opinion What it is A formal opinion of value prepared by a credentialed appraiser to a recognized professional standard. What it takes A full engagement — documents, analysis, a written report. Weeks, and several thousand dollars or more. Good for Tax filings, litigation, divorce, and anywhere a number may be challenged and has to survive scrutiny. Who stands behind it A named appraiser who signs the opinion and can defend it. An indication of value is not a certified appraisal, and the two are not substitutes. The skill is knowing which one your situation actually requires. Decide in one click What is the valuation actually for? Planning, or just curious Selling the business Buying a partner out Divorce Estate or gift tax filing An IRS matter or litigation An SBA or bank loan Indication of value An indication of value is exactly right. For planning or curiosity, an estimate answers the question. Don't pay for a formal appraisal to satisfy either one. Indication of value Start with an indication of value. For setting expectations and preparing the business, an estimate is the right tool. The price gets set by the buyer and the market — an appraisal doesn't change that. It depends It depends on your agreement — check it first. If your buy-sell names a valuation method or a certified appraiser, follow it. If it's silent, an indication of value can anchor a fair negotiation between partners. Certified appraisal You'll likely need a certified appraisal. Contested matters generally call for a credentialed appraiser whose opinion can stand up in court. An estimate orients you, but it won't carry the weight. Certified appraisal You'll need a certified appraisal. The IRS generally expects a qualified appraisal for gift- and estate-tax filings. An estimate is useful for planning the move — not for making the filing. Certified appraisal You need a certified appraisal. Anything that may be challenged needs a signed, defensible opinion from a credentialed appraiser. This is not the place for an estimate. It depends Check the lender's requirement before you pay for anything. Lenders set their own rules, and many SBA acquisition loans require an independent business appraisal. Find out what your lender accepts before you commission the wrong document. Notice how often the answer is the cheaper one. That isn't modesty. It's not selling you something you don't need. Common questions Can I use an indication of value to negotiate a sale? Yes — that's exactly what it's for. It sets your expectations and anchors the conversation. The buyer's offer, your counter, and the final price are negotiated on top of it. You don't need a certified appraisal to sell a business. Why can't I just use the cheaper estimate for my taxes? Because the IRS sets the standard, not you. Gift- and estate-tax filings generally call for a qualified appraisal, and an estimate won't meet the requirement. Filing with the wrong document is the kind of mistake that surfaces years later, at the worst possible time. If I'll eventually need an appraisal, should I just start there? Usually not. An indication of value tells you whether the formal work is even worth commissioning — whether the numbers are in the range you expected, whether now is the right time. Spend the larger sum once you know it's the right move. Not sure which you need? That's a five-minute conversation, and it's the kind of thing I'll tell you straight. Get your business valuation Ask Chuck which you need --- ## What Every Texas Business Owner Should Know Before Firing an Employee URL: https://kraus.law/insights/before-firing-an-employee/ Employment May 12, 2026 10 min read What every Texas business owner should know before firing an employee. Texas is at-will, but at-will doesn't mean consequence-free. Seven specific things that turn a routine termination into an employment lawsuit, and exactly what to do about each one before you have the conversation. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Employment Litigation If you read nothing else The most expensive terminations aren't the contested ones, they're the ones that seemed routine. Before you have the conversation: confirm the stated reason is documented and pre-dates any protected activity; verify the six-day final paycheck deadline under the Texas Payday Law; and check whether the employee has an open FMLA, ADA accommodation request, or workers' comp claim. Any one of those, without documentation of an independent reason for termination, converts a clean at-will separation into a viable lawsuit. Seven specific risks are listed below, each with what to do and what not to do. The checklist at the end is designed to be answered before you schedule the conversation. Call us: (682) 529-7177 Texas is an at-will state. You don't need cause to fire someone. But the at-will doctrine doesn't protect you from illegal reasons, and what makes a reason "illegal" is broader than most business owners realize. It's not just firing someone because of their race or gender. It's firing someone within 90 days of a workers' comp claim. It's firing someone the week they return from FMLA leave. It's firing someone after a verbal conversation where you said "this job is yours for as long as you want it." The seven risks below are the ones I see most consistently in Texas business terminations. Each one has a "what to do" and a "what not to do." Read them before you make a decision, not after. The seven risks Risk 01 Discrimination claims, even unintentional ones High The scenario: You fire an employee who is underperforming. The employee happens to be over 40, or pregnant, or a member of a protected class. You had a legitimate reason. But it's the only termination in your department this quarter, and the employee's protected characteristic is obvious. Federal and Texas law prohibit termination based on race, color, sex, national origin, religion, age (40 and over), disability, pregnancy, or genetic information. The critical word is "based on", not "only because of." A court doesn't require proof that discrimination was the sole reason. Under the mixed-motive framework, if a protected characteristic was a motivating factor , even alongside a legitimate reason, the employer has exposure. The most common version of this isn't overt bias. It's the performance-based termination where the documentation is thin, the reason is vague, and a comparator employee who is not in the protected class was treated differently for similar conduct. What to do Document the reason in writing before the termination, with specificity. Identify whether any similarly situated employee outside the protected class was treated differently for the same conduct, if so, understand why. Have someone not involved in the decision review the termination rationale before it happens. Risk 02 Retaliation timing High The scenario: An employee filed a workers' comp claim six weeks ago. Their performance has been declining. You've been meaning to address it. You finally do, and the termination happens eight weeks after the claim. Texas Labor Code §451 prohibits terminating an employee in retaliation for filing a workers' compensation claim. Retaliation claims also arise under Title VII (for reporting discrimination), the FLSA (for wage complaints), OSHA (for safety reporting), and the Texas Whistleblower Act. The plaintiff's lawyers don't need to prove you were motivated by retaliation. They need to show temporal proximity, that the termination followed protected activity closely enough that a jury could infer a connection, and that your stated reason doesn't hold up under scrutiny. A performance-based termination that was already underway when the protected activity occurred is defensible. A performance-based termination that started after the protected activity is not. What to do Before any termination, check the employee's file for any protected activity in the past six months: complaints, claims, requests, or reports. If any exist, the stated reason for termination must be documented with evidence that predates the protected activity, performance reviews, warnings, or emails. Timing alone doesn't prevent you from terminating for a legitimate reason. But timing without documentation is a problem. Risk 03 FMLA and ADA intersection High The scenario: An employee has been out on FMLA leave for three weeks for a serious health condition. Their 12-week entitlement is running. You need to fill the role. You decide to eliminate the position while they're out. The Family and Medical Leave Act prohibits interference with FMLA rights and retaliation for taking FMLA leave. Terminating an employee during or immediately after FMLA leave creates a presumption of retaliation that is difficult to overcome without a documented, independent business reason that pre-dates the leave request. The ADA adds another layer: if the condition that caused the FMLA leave is also a disability under the ADA, the employer may have an obligation to provide reasonable accommodation, including additional unpaid leave, before termination. The employer's obligations under the ADA are broader than most business owners realize: even a brief condition can qualify as an ADA disability, and the interactive process requirement (a good-faith dialogue about accommodations) must happen before a termination decision is finalized. What to do If an employee is on FMLA leave or has recently requested leave, involve employment counsel before making any termination decision. The elimination of a position during FMLA leave is permissible if it's a genuine business restructuring, not if the timing is coincidental to the leave. The interactive process documentation under the ADA must exist regardless of what you ultimately decide. Risk 04 Verbal promises that create implied contracts Medium The scenario: When you hired the employee two years ago, you said "this is a long-term role, we see you being here for years." Or: "As long as you perform, this job is yours." Neither statement was in writing. You didn't think of it as a promise. The employee did. Texas courts have recognized that verbal statements by employers, during hiring, in performance reviews, or in conversations about the future, can create implied contracts that modify the at-will relationship. "You'll have a job here as long as you do good work" has been interpreted by courts as a promise of termination only for cause. Employee handbooks can also create contractual obligations if they contain specific termination procedures and the employer fails to follow them. Most Texas employers protect themselves with an at-will disclaimer in offer letters and handbooks. But that disclaimer can be undermined by specific oral promises made after the disclaimer was signed. What to do Before terminating a long-tenured employee or anyone hired with assurances about job security, review the offer letter, the employee handbook, and any written communications about the role. If there are verbal promises you're aware of, that context matters. Train managers and executives to avoid specific language about job security, "as long as," "you'll always have a place here," "we'd never let someone like you go", that could be interpreted as contractual commitments. Risk 05 Final paycheck timing under Texas Payday Law High The scenario: You terminate an employee on a Thursday afternoon. The next payroll run is in 12 days. You plan to include their final check in that run. That is a violation of Texas law. The Texas Payday Law (Texas Labor Code Chapter 61) requires that an involuntarily terminated employee receive their final paycheck within six calendar days of the termination date. This is not the next pay period. This is not when it's convenient. It is six days. The final check must include all earned wages, base pay through the last day, any commissions or bonuses that are earned and determinable, and any accrued PTO that your written policy defines as earned wages. Late final pay exposes the employer to TWC administrative proceedings and penalty assessments. Officers and owners can face personal liability. This is one of the most routinely violated provisions in Texas employment law, and it's enforced. What to do Before the termination conversation, confirm the final paycheck amount with payroll. Have the check (or the direct deposit) ready to issue within six days. Review your PTO policy to determine what is owed. If your payroll system can't move that fast, have a manual process ready. The six-day clock starts the moment the termination is communicated, not when the paperwork is processed. Risk 06 Non-compete enforceability after termination Medium The scenario: You terminate an employee who has a non-compete in their employment agreement . You assume the non-compete is enforceable because they signed it. Three months later, they're working for your largest competitor. Texas non-competes are enforceable under the Covenants Not to Compete Act, but only if they meet specific requirements, and only if the circumstances of termination don't undermine enforceability. The CNCA requires that the non-compete be ancillary to an otherwise enforceable agreement (usually an employment agreement with confidentiality provisions) and reasonable in scope, duration, and geographic area. The enforceability question after termination turns on two things: whether the agreement was properly drafted to begin with (many aren't, LegalZoom-style agreements frequently don't meet CNCA requirements), and whether the manner of termination affects the employee's ability to earn the consideration they were promised. If you terminate without cause in a way that deprives the employee of what they were promised, a court may decline to enforce the restriction. The FTC rule remains enjoined as of this writing, but that status is subject to change, employers relying on non-competes should have current counsel review them. What to do Before a termination where non-compete enforcement matters, have the agreement reviewed. Determine whether it meets CNCA requirements and whether the circumstances of termination affect enforceability. If the non-compete is valid and enforcement is important to the business, the method of separation, including whether severance is offered, may affect your ability to enforce it. Risk 07 Documentation gaps High The scenario: The employee has been underperforming for 18 months. Everyone on the team knows it. There have been conversations. But there's nothing in writing, no performance reviews, no warnings, no emails with specific feedback. When the termination is challenged, the only record is the employee's account of what happened. Documentation is not bureaucracy. It is the only contemporaneous evidence of what happened. In employment litigation, the question is almost never whether the employer had a good reason, it's whether the employer can prove the reason was real, pre-existing, and consistently applied. A termination without documentation requires the employer to rely entirely on testimony, which is subject to credibility challenges and contradicted by whatever the employee says. The most common documentation failures: performance reviews that don't address actual problems, verbal warnings with no written record, inconsistency in how the policy was applied across different employees, and the complete absence of any paper trail before the final conversation. What to do If the performance history isn't documented, take the time to document it before the termination, not as a retroactive paper trail, but as an accurate record of what has occurred. A written performance improvement plan, even if issued shortly before termination, is better than nothing. If the termination needs to happen immediately (safety issue, policy violation, misconduct), document the specific incident in detail within 24 hours. The contemporaneous written record is your evidence. Before you have the conversation The termination conversation itself is not where the risk is created. The risk is created in the weeks before it, by the lack of documentation, the unreviewed protected activity, the payroll system that can't produce a check in six days. The checklist below is designed to be answered before you schedule the meeting. If you can't answer all five questions affirmatively, that's the signal to pause and address what you can't answer. Pre-termination checklist Five questions to answer before you schedule the conversation Is the reason for termination documented in writing, with specificity? Not "performance issues", specific incidents, dates, standards missed. If it isn't written, write it now, dated accurately. Has the employee engaged in any protected activity in the past 90 days? Workers' comp claims, FMLA requests, ADA accommodation requests, discrimination complaints, OSHA reports, wage complaints. If yes, consult employment counsel before proceeding. Have similarly situated employees been treated consistently for the same conduct? Identify the two or three most comparable employees. If any were treated more leniently for the same issue, document the distinguishing factors or address the inconsistency before terminating. Is payroll ready to issue the final check within six calendar days? Confirm the amount including any accrued PTO owed under your written policy. The clock starts at termination, not at the next payroll run. If you're offering severance, is the release agreement compliant, including OWBPA requirements for employees over 40? A non-compliant release is unenforceable. For employees 40 and over: the ADEA must be specifically mentioned, the employee gets 21 days to consider, and 7 days to revoke after signing. If you can't answer all five affirmatively, that's the signal to pause, not cancel, but pause. Fix what you can fix. Document what isn't documented. Then have the conversation. The role of the termination conversation itself The conversation is brief. It is not a negotiation, a performance review, or a therapy session. The structure I recommend to every client: state the decision clearly ("We're ending your employment today"), give the specific stated reason in one or two sentences, provide the logistics (final pay, benefits continuation, return of equipment), and stop talking. Do not elaborate. Do not argue. Do not apologize in ways that suggest the decision is reversible. The termination conversation should last twelve minutes. The legal exposure from that conversation is almost always created in the minutes after it ends. Have a witness present, typically an HR representative or a manager who was not the decision-maker. Take contemporaneous notes immediately after. If the employee says anything significant, makes a claim, references a protected complaint, disputes the stated reason, document it verbatim within the hour. The paperwork that follows matters: the separation agreement (if any), the COBRA notice (required within specific deadlines), the final paycheck documentation, and the termination record in the employee's file. Each of these has its own timeline and format requirements. Employment counsel can walk through the checklist for your specific situation in a single call. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help Employment law intersects with corporate work constantly. Termination decisions carry exposure that extends well beyond the employment relationship itself — board liability, regulatory risk, and reputational consequences that affect the business long after the separation is complete. Understanding what that exposure looks like from the inside is essential to advising on it effectively. When employment law questions arise, Scale LLP's employment attorneys handle the specialized work — wrongful termination, discrimination claims, executive separation agreements, WARN Act compliance. The business and governance side stays coordinated through one counsel relationship. You get an employment attorney who knows the law and a GC who knows your business. One call starts the process. Schedule a Call Going deeper Questions I hear from business owners before and after a termination. Is Texas really an at-will employment state? What does that mean? Yes, Texas follows the at-will employment doctrine, which means either party can end the employment relationship at any time, for any reason or no reason, without notice, as long as the reason isn't an illegal one. The "any reason" part is real: you can fire someone because they underperform, because the role is being eliminated, or because you simply want to. What at-will doesn't protect: terminations based on a protected characteristic (race, sex, age, national origin, disability, religion, pregnancy, genetic information), terminations that retaliate against protected activity (a workers' comp claim, a safety report, a discrimination complaint, FMLA leave), and terminations that breach a specific contract or verbal promise. The mistake most employers make is assuming at-will makes them bulletproof. It doesn't. It means the employee has to prove an illegal reason, not just an unfair one. What counts as wrongful termination in Texas? In Texas, "wrongful termination" has a specific legal meaning, not unfair or unreasonable, but a violation of a specific law or contract. The most common grounds: (1) Discrimination under Title VII, the Texas Commission on Human Rights Act, the ADEA, or the ADA, a protected characteristic was a motivating factor. (2) Retaliation, the termination followed protected activity like filing a discrimination complaint, reporting an OSHA violation, taking FMLA leave, or filing for workers' compensation. (3) Breach of contract, the employer made a specific promise about employment terms, in writing or verbally, and then violated it. (4) Violations of specific statutes, the WARN Act for large layoffs, the Texas Payday Law for final pay. Wrongful termination does not mean the employer was harsh, inconsistent, or dishonest about the reason. It means the reason, or a contributing reason, was an illegal one. Can I fire an employee who is currently on FMLA leave? You can terminate an employee on FMLA leave, but the timing creates a legal presumption of retaliation that is very difficult to overcome. The defensible path requires two things: the reason for termination must be completely independent of the FMLA leave, a genuine business reason that would have resulted in termination regardless, and that reason must be documented with contemporaneous evidence that predates the FMLA request. "We were planning to eliminate this position before they requested leave" is defensible if you have emails, org charts, or financial records that support it. It is not defensible if those records were created after the fact. If the condition that caused the leave is also a disability under the ADA, the employer may have an obligation to provide reasonable accommodation, including additional unpaid leave, before termination. When does a terminated employee's final paycheck have to be issued in Texas? Under the Texas Payday Law, an involuntarily terminated employee must receive their final paycheck within six calendar days of the termination date, not the next pay period. The final check must include all earned wages, including any accrued vacation or PTO that your written policy defines as earned wages. Late final pay exposes the employer to TWC administrative proceedings, penalty assessments, and personal liability for owners and managers. This is routinely enforced and routinely violated. Before the termination conversation, confirm with payroll that the check can be issued within six days. Does the employee have to sign a severance agreement? Can I condition severance on a release? No employee is required to sign a severance agreement, and you cannot condition the final paycheck on signing one. The final paycheck is owed regardless of whether the employee signs anything. Severance, any payment beyond what is legally required, is voluntary consideration you can condition on a signed release of claims. For the release to be enforceable, it must be supported by consideration, knowing and voluntary, and must specifically mention the claims being released. For employees over 40, the Older Workers Benefit Protection Act requires specific disclosures, a 21-day consideration period, and a 7-day revocation window, none of which can be waived. A release that doesn't comply with OWBPA for an employee over 40 is unenforceable as to the ADEA claims, which are often the most valuable ones. Are my non-competes still enforceable after I terminate an employee? In Texas, non-competes are enforceable after termination if they meet CNCA requirements, ancillary to an otherwise enforceable agreement, reasonable in scope, duration, and geography. The enforceability question after termination turns on whether the agreement was properly drafted and whether the circumstances of termination affect the employee's ability to earn what they were promised. If you terminate without cause in a way that deprives the employee of their promised consideration, a court may decline to enforce the restriction. The FTC's non-compete rule remains enjoined as of this writing, but that status is subject to change. Every employer relying on non-competes should have current counsel review them. What documentation should I have before terminating an employee? Before the termination conversation, you should have: the employee's signed offer letter or employment agreement; performance reviews, documented verbal warnings, and written warning notices; the specific policy or performance standard the employee violated and evidence of the violation; documentation showing other employees were treated consistently for similar conduct; any communications about protected activity in the past six months, these must be reviewed carefully; and documentation of any promises made about job security or severance. The standard is not perfection, employers are allowed to make business decisions. But without documentation, the employee's account of what happened fills the vacuum, and their account will be less favorable than yours. Do I have to give advance notice before terminating an employee in Texas? For most terminations, no, Texas at-will means you can terminate without advance notice. Exceptions: the federal WARN Act requires 60 days' notice for mass layoffs affecting 50 or more employees at a single site. The Texas mini-WARN statute (Labor Code Chapter 204) applies to employers with 100 or more employees and requires 60 days' notice for closings or layoffs affecting 50 or more workers. Individual employment contracts may specify notice requirements, if your agreement requires 30 days' notice, you are bound by it. For executive terminations or long-tenured employees whose cooperation matters during transition, some form of negotiated separation timeline is often worth the cost. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. At-Will Employment Employment Agreement Wrongful Termination Severance Agreement Workplace Discrimination Final Paycheck For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Employment Law at Scale LLP Explore Texas Business Law Explore Selling Your Business in Texas: The Owner's Roadmap Read Business Litigation at Scale LLP Explore Better to call before the conversation than after. A fifteen-minute call with Chuck can tell you whether the termination you're planning is clean, and what to address if it isn't. Schedule a Call (682) 529-7177 This article provides general information about Texas employment law and is not legal advice for your specific situation. Every termination involves unique facts, governing documents, and circumstances. If you are considering terminating an employee, particularly one who has engaged in protected activity or is in a protected class, consult an attorney licensed in your jurisdiction before taking action. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Business Divorces in Texas: When Partners, Shareholders, and LLCs End Badly URL: https://kraus.law/insights/business-divorces-texas/ Litigation · Governance July 30, 2026 12 min read Business divorces in Texas: when partners, shareholders, and LLCs end badly. The clean version of a partner exit follows the buy-sell agreement and ends in a documented buyout. The contested version is a different matter, one in which the legal infrastructure either never anticipated this dispute or has now become the battleground itself. Five trajectories, the post-Ritchie reality of Texas minority shareholder remedies, and the strategic decisions that determine the outcome. By Charles R. Kraus Partner, Scale LLP Practice areas this article covers Litigation Governance Corporate If you read nothing else Texas closely held businesses operate under a legal framework that has become significantly more management-protective since the Texas Supreme Court's 2014 decision in Ritchie v. Rupe . The court rejected a common law cause of action for shareholder oppression that would permit a buyout remedy and limited the statutory rehabilitation receiver remedy to circumstances warranting actual rehabilitation of the corporation. The practical consequence: Texas minority shareholders without contractual buyout protections have meaningfully less leverage than in many other states , and breach of fiduciary duty and derivative claims have become the principal substantive vehicles for addressing majority misconduct. For owners on either side of a contested dispute, the operating agreement or shareholder agreement is now more determinative of outcomes than statutory or common law protections, and the absence of well-drafted contractual provisions is the single most consequential factor in how Texas business divorces resolve. Call us: (682) 529-7177 A clean partner exit follows the operating agreement, triggers a buy-sell, produces a valuation through the agreed mechanism, and ends in a documented buyout. The relationship was already over by the time the legal work began; the legal work simply executes the parties' prior planning. The earlier article in this series, Your Business Partner Wants Out , covers this version of the story. This article covers the other version. The version where the operating agreement is silent on the contested issue, or addresses it ambiguously, or addresses it adequately but the parties dispute its application. The version where one owner has been excluded from management, or denied financial information, or watched the majority pay itself escalating compensation while distributions stopped. The version where the relationship between the principals has decayed to the point that one or both has retained litigation counsel and the matter is now a contested commercial dispute between people who chose each other to be in business. The version, in short, where the partnership has become litigation. The five trajectories Most Texas business divorces fall into one of the five recurring patterns below. Each has its own legal theories, available remedies, and Texas-specific considerations. The trajectories are not mutually exclusive, many contested matters combine elements of two or more, but identifying the dominant pattern is the most useful starting point for strategy. Trajectories Five recurring patterns of Texas business divorce 01 Trajectory 01 The 50/50 deadlock Two equal owners disagree on a fundamental matter. Neither will yield. The business cannot make decisions. The dispute has been going on long enough that employees and customers are beginning to notice. Legal theories Judicial dissolution under TBOC § 11.314 (LLCs) or analogous corporate provisions Receivership under TBOC § 11.404 Breach of operating agreement for failure to operate in good faith Declaratory judgment on contested governance question Available remedies Court-ordered dissolution and winding up Appointment of receiver to operate or liquidate Specific performance of deadlock provisions Damages for ongoing harm to entity value Texas considerations The " not reasonably practicable " standard under § 11.314 is narrow Courts prefer alternatives short of dissolution Operating agreement deadlock provisions, if present, typically control Receivership adds cost but preserves business value What changes the trajectory: Operating agreements with deadlock resolution mechanisms, shotgun buy-sell, mandatory mediation, or a tiebreaking authority, convert the situation from a litigation event into contract enforcement. 02 Trajectory 02 The minority squeeze-out The majority has stopped distributions while paying itself escalating compensation. The minority owner has been excluded from management, denied financial information, and is being pressured to accept a below-value buyout. Legal theories Breach of fiduciary duty by majority and directors Derivative action under TBOC §§ 21.551–21.563 (corporations) or §§ 101.451–101.463 (LLCs) Breach of operating or shareholder agreement Demand for inspection of books and records Available remedies Damages for diminution in value Disgorgement of excessive compensation Equitable relief affecting governance Contractual buyout if agreement provides Texas considerations Ritchie v. Rupe eliminates direct oppression buyout remedy Fiduciary duty and derivative claims now do the work Operating agreement protective provisions become decisive Inspection rights under TBOC are an underused leverage tool What changes the trajectory: Shareholder or operating agreements with put rights, mandatory distribution provisions, or compensation governance ceilings convert oppression conduct into contract breach with clearer remedies. 03 Trajectory 03 The departing co-founder who took the business A co-founder resigns. Within a week, key employees follow. Within a month, important customers have moved their business. The departed co-founder is operating a competing firm with what looks like the company's customer list and trade secrets. Legal theories Breach of fiduciary duty for pre-departure solicitation Breach of restrictive covenants under Texas CNCA Misappropriation of trade secrets under TUTSA Tortious interference with business relations Available remedies Temporary restraining order and preliminary injunction Damages for lost business and unfair competition Disgorgement of profits from competing activity Permanent injunctive relief on misappropriated assets Texas considerations Speed of injunctive relief, measured in days, not weeks Texas CNCA enforceability requires statutory compliance TUTSA preempts most common law trade secret claims Litigation hold and evidence preservation critical immediately What changes the trajectory: Enforceable restrictive covenants, IP assignment agreements, and contemporaneous evidence of pre-departure solicitation determine whether the emergency injunctive phase succeeds or fails. 04 Trajectory 04 The fiduciary breach by the majority The minority discovers that the majority has been engaging in self-dealing transactions, diverting business opportunities to affiliates, or otherwise extracting value from the entity in ways that benefit the majority at the entity's expense. Legal theories Breach of fiduciary duty , duty of loyalty Derivative action on behalf of the entity Breach of operating agreement (if conflict provisions exist) Constructive trust / unjust enrichment Available remedies Damages payable to the entity in derivative action Disgorgement of improper benefits Voiding of self-dealing transactions Removal of fiduciaries; structural relief Texas considerations Business judgment rule defenses for documented decisions TBOC safe harbor for properly disclosed conflicted transactions Derivative procedure: demand requirement, futility exceptions Punitive damages available for malicious conduct What changes the trajectory: The strength of the fiduciary breach claim turns on whether conflicted transactions were disclosed, approved by disinterested decision-makers, and documented at the time, not after the fact. 05 Trajectory 05 The dissolution by one partner A partner or member wants out. The governing documents do not address voluntary withdrawal in any way that produces a buyout. The partner files for judicial dissolution or attempts to dissolve through statutory mechanisms. Legal theories Judicial dissolution under TBOC § 11.314 Statutory winding up under TBOC Chapter 11 Accounting (for partnerships) Breach of operating agreement if agreement is silent Available remedies Court-ordered winding up and liquidation Accounting and distribution of assets Court-supervised buyout in certain circumstances Receivership if liquidation requires neutral management Texas considerations Dissolution destroys going-concern value The Charging Order Only protections under TBOC §§ 101.112 / 153.256 limit transfer alternatives Partnership dissolution mechanics differ from LLC/corporate Tax consequences of dissolution often consequential What changes the trajectory: Buy-sell provisions in the operating agreement that provide a withdrawal mechanism, whether a put right, scheduled buyout, or trigger-based exit, convert this from a dissolution proceeding into a structured exit. The post-Ritchie reality The 2014 Texas Supreme Court decision in Ritchie v. Rupe , 443 S.W.3d 856 (Tex. 2014), is the single most important Texas authority shaping minority shareholder protection in closely held corporations. The court rejected a common law cause of action for shareholder oppression that would permit a buyout remedy and limited the statutory rehabilitation receiver remedy under what is now TBOC § 11.404 to circumstances warranting actual rehabilitation of the corporation. The decision was, by design, a significant narrowing of minority shareholder protections in Texas relative to other jurisdictions. The practical consequences shape how every Texas business divorce involving a closely held corporation now operates. Direct oppression claims are not available as a vehicle for buyout in the way they are in many other states. The remedies that remain, breach of fiduciary duty, derivative actions, breach of contract, statutory remedies for specific corporate actions, are real and meaningful, but they require different framing and produce different relief than direct oppression claims would. The remedies are typically damages, disgorgement, and equitable relief rather than the court-ordered buyout that minority shareholders in other jurisdictions can sometimes obtain. For Texas LLCs the analysis is somewhat different. The TBOC LLC provisions and case law have continued to evolve, and judicial dissolution under § 11.314 remains a meaningful remedy in cases of serious dispute. But the underlying lesson is the same as for corporations: contractual protections in operating agreements have become significantly more important than statutory or common law protections, because the statutory and common law landscape provides less leverage than minority owners often expect. The Texas-specific pitfalls Beyond the Ritchie reality, several Texas-specific features of business divorce law are worth surfacing because they consistently surprise out-of-state counsel and inexperienced parties. Texas-specific framework Three features of Texas business divorce law that surprise out-of-state counsel Charging-order-only protection limits creditor and dispute leverage Tex. Bus. Orgs. Code §§ 101.112, 153.256 An owner whose interest in a Texas LLC or LP is subject to a charging order from a judgment creditor receives meaningful protection. The same protection limits creditor leverage in business divorce contexts where one owner has obtained a judgment against another. The charging order attaches distributions, not management or ownership rights , and entities that do not distribute can effectively neutralize the charging order. This shapes settlement dynamics significantly. The Texas Citizens Participation Act creates anti-SLAPP exposure in commercial litigation Tex. Civ. Prac. & Rem. Code Ch. 27 The TCPA, originally designed as an anti-SLAPP statute for free speech matters, has been broadly applied by Texas courts to commercial litigation involving communications and association rights. Counsel who file business divorce claims involving any communicative or associational element, and most do, should anticipate TCPA motions to dismiss, with attorney's fees recoverable by the prevailing movant . The TCPA was amended in 2019 to narrow some applications, but it remains a meaningful procedural tool in business divorce defense. Pre-suit deposition under Rule 202 creates strategic options Tex. R. Civ. P. 202 Texas Rule of Civil Procedure 202 permits a party to petition for a deposition before suit is filed, either to investigate a potential claim or to perpetuate testimony. This is a meaningful pre-suit investigative tool in business divorce contexts where the available facts are inadequate for confident pleading. A Rule 202 petition can produce sworn testimony from key parties, witnesses, or third parties before the formal litigation begins, often yielding settlement leverage or, alternatively, definitive support for the merits of the claim. The procedural requirements are specific and the courts evaluate Rule 202 petitions carefully, but the tool is underused. The operating agreement is not the document you read at formation. It is the document you read when the relationship is over and one party is asking what their rights are. The strategic decisions that determine outcomes Three strategic decisions consistently shape the outcome of contested Texas business divorces. None of them are about doctrine, the doctrine is what it is. They are about how the matter is positioned, paced, and pressed. The decision about claims selection. A contested business divorce typically supports multiple legal theories, and the choice of which to plead, which to lead with, and which to hold in reserve materially affects the case. Plaintiffs who plead every available theory simultaneously dilute the strongest claim with weaker ones; plaintiffs who plead too narrowly miss leverage points that would have produced settlement or relief. The selection should be deliberate and informed by post-Ritchie reality, fiduciary duty and derivative claims do most of the work that direct oppression claims would have done in other states. The decision about pacing. Business divorce litigation typically takes 18 to 36 months from filing to final resolution, and the underlying business is operating during the litigation. The pacing of motions, discovery, and settlement positions affects both the cost of the litigation and the value of the underlying business at resolution. Plaintiffs who push for fast resolution often sacrifice leverage; defendants who slow-walk discovery often increase the legal exposure rather than reducing it. The right pace depends on the matter, but it should be deliberate, not reactive. The decision about counsel structure. Contested business divorces are commercial litigation matters that require litigation counsel with the experience and bandwidth to handle them. They are also corporate matters that require understanding of the entity, its history, its governance, and its relationships. The structural decision is whether litigation counsel handles the matter end-to-end, whether corporate counsel handles strategy with litigation counsel handling the contested work, or whether a fractional general counsel relationship coordinates between them. The answer depends on the matter's complexity and the existing counsel relationships, but the decision should be deliberate at the outset rather than improvised as the matter develops. What this article cannot tell you The trajectories above describe patterns. Your specific situation may fit one of them cleanly, or it may combine elements of two or three. The selection of legal theories, the pacing of the matter, the strategic positioning, and the choice of counsel are decisions that depend on facts that a general article cannot evaluate. The most useful step for an owner currently in a contested business dispute, or an owner who anticipates one, is the working session that maps the specific facts onto the available theories and remedies. That session produces a working direction in fifteen minutes, and is the conversation the rest of this engagement turns on. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help The strategic decisions are made before the petition is filed. My practice covers business divorce strategy at the structural level, claims analysis, pre-litigation positioning, counsel coordination, and the early decisions that shape how a contested matter develops. The work is part of the broader corporate counsel relationship for many Texas businesses, and operates as a defined engagement for owners facing a specific dispute. When matters move into contested litigation, derivative actions, judicial dissolution proceedings, fiduciary duty claims, emergency injunctive relief, Scale LLP's litigation team handles the courtroom work, with the strategic analysis integrated. The boundary between the strategic side and the litigation side is intentional. The analysis that shapes the case is different work from the litigation that pursues it, and they are typically best handled by attorneys whose primary practice fits each. For owners in or anticipating a contested partner, shareholder, or LLC dispute, the first conversation produces a useful direction. Whether the right path is litigation, negotiated buyout, structural change, or another option depends on facts that the conversation will surface. Going deeper on this topic? My colleague Brian Elliott and I covered Senate Bill 29's reforms to minority shareholder rights, derivative actions, and the dynamics of partner disputes on the Y'all Street Law Podcast, Episode 11: The Texas Corporate Law Overhaul . Schedule a Call Going deeper Questions I hear from Texas owners facing contested partner, shareholder, and LLC disputes. What is a business divorce? A business divorce is the contested separation of co-owners of a privately held business, partners in a partnership, shareholders in a closely held corporation, or members in a limited liability company, when the relationship has broken down and the parties cannot agree on how to disengage. The term is informal but useful because it captures what these matters feel like to the people in them: the dissolution of a working relationship that was built on trust, with the legal infrastructure that should have governed the breakup either inadequate, ambiguous, or never created. Business divorces typically combine claims, breach of fiduciary duty, breach of operating or shareholder agreements, derivative actions, oppression claims (with limits in Texas), wrongful exclusion from management, denial of distributions or financial information, and disputes over valuation and buyout. The legal complexity is a function of how many of these are in play simultaneously and whether the governing documents addressed the contested issue. When documents are well-drafted, resolution is largely contract enforcement. When silent or ambiguous, resolution becomes statutory, common law, and equitable, significantly more expensive and uncertain. What is minority shareholder oppression in Texas after Ritchie v. Rupe? The Texas Supreme Court's 2014 decision in Ritchie v. Rupe materially narrowed minority shareholder protection in Texas closely held corporations. The court held that Texas's statutory rehabilitation receiver remedy (now codified at TBOC § 11.404) does not authorize a court-ordered buyout of a minority shareholder's stock as a remedy for oppression, and rejected recognition of a common law cause of action for shareholder oppression that would permit a buyout. The practical consequence: a minority shareholder facing classic oppression conduct, exclusion from management, denial of distributions while the majority pays itself above-market compensation, failure to provide financial information, freeze-out from operations, cannot pursue a direct cause of action for oppression that produces a buyout. The remedies that remain are still meaningful but require different framing: breach of fiduciary duty, breach of shareholder agreement, derivative actions, statutory remedies for specific corporate actions, and judicial dissolution under narrow circumstances. Contractual protections in shareholder agreements have become significantly more important than statutory or common law protections. Can I force the dissolution of a Texas LLC? Yes, under specific circumstances. Section 11.314 of the Texas Business Organizations Code permits a court to dissolve a Texas LLC on application of a member when "it is not reasonably practicable to carry on the business in conformity with the company agreement." This is meaningful but narrow, courts apply it carefully because dissolution destroys an operating business. Circumstances that have supported dissolution: persistent deadlock among members on fundamental questions; abandonment of the business by managing members; inability to operate the business meaningfully due to disputes; serious misconduct by managing members destroying the relationship beyond recovery. Circumstances that typically do not support dissolution: ordinary business disagreements; strategic disagreements where the business continues to operate; minority dissatisfaction with otherwise lawful majority decisions. Courts have broad discretion to fashion remedies short of full dissolution, appointing a receiver under § 11.404, ordering an accounting, or imposing structural changes. For corporations, judicial dissolution under TBOC Chapter 11 is similarly narrow. What is a derivative lawsuit and when can I bring one? A derivative lawsuit is a claim brought by an owner on behalf of the entity itself, against persons who have allegedly harmed the entity. The lawsuit is "derivative" because the claim belongs to the entity, not directly to the owner; the recovery, if any, goes to the entity rather than to the owner who brought the suit. Texas authorizes derivative actions for corporations under TBOC §§ 21.551–21.563, and for LLCs under §§ 101.451–101.463. They are particularly useful in business divorces involving allegations that the majority has caused harm to the entity, through self-dealing, diversion of opportunities, excessive compensation, breach of fiduciary duty, or fraud. Procedural requirements: the plaintiff must have been an owner at the time of the alleged wrongdoing; demand on the entity (or directors) is typically required before suit, with limited futility exceptions; the entity is named as nominal defendant. Derivative actions are the primary vehicle for addressing majority misconduct in Texas closely held corporations after Ritchie v. Rupe. Remedies include damages payable to the entity, equitable relief including disgorgement, and structural relief affecting governance. How do you prove breach of fiduciary duty between business partners? The elements: (1) a fiduciary relationship existed between the parties; (2) the defendant breached the fiduciary duty owed; (3) the breach caused damages. Texas recognizes fiduciary duties among partners, between majority and minority owners in closely held businesses, between directors and corporations, between managing members and LLCs, and in other relationships of trust and confidence. The duties typically include the duty of loyalty (placing entity or other-owner interests above one's own), the duty of care (acting with reasonable care), and the duty of good faith and fair dealing. Common forms of breach in business divorce contexts: self-dealing transactions without disclosure and disinterested approval; diverting corporate or partnership opportunities; using confidential information for personal benefit; competing with the entity in violation of duty; excessive compensation effectively distributing entity value to the majority; freeze-out of minority owners from information, management, or distributions. Damages can include direct damages, lost profits, disgorgement, and in cases involving intentional conduct, punitive damages. Breach of fiduciary duty claims often survive procedural defenses that defeat direct oppression claims and provide the substantive cause of action that anchors most contested business divorce litigation in Texas. What remedies are available in a Texas business divorce? The remedies depend on the specific claims and the facts. Damages, compensation for actual losses caused by wrongful conduct, are available in most contexts and represent the most common form of relief. Disgorgement requires a defendant to surrender benefits improperly obtained. Specific performance is available in some cases to enforce buy-sell agreements, shareholder agreements, or operating agreements. Injunctive relief, preliminary or permanent, can prevent ongoing harm during the litigation, particularly in matters involving misuse of confidential information, breach of restrictive covenants, or threats to going-concern value. Receivership under TBOC § 11.404 permits appointment of a receiver to manage the entity in cases of serious deadlock or misconduct. Judicial dissolution under § 11.314 (LLCs) or other Chapter 11 provisions (corporations) is available in narrow circumstances. Contractual buyouts under buy-sell agreements provide the cleanest resolution where they exist. Punitive damages are available in cases involving fraud, malice, or gross negligence. Attorney's fees may be recoverable under specific statutory provisions or contract terms. The package pursued is typically a combination designed to address the particular wrongful conduct. Can I be bought out of my Texas LLC if my partners want me out? Maybe, depending on the operating agreement. Texas does not provide a default statutory right for an LLC member to be bought out by the company or by other members in the absence of contractual provisions creating that right. The operating agreement is the primary source of buyout rights. Well-drafted operating agreements include some combination of: buy-sell provisions triggered by specific events (departure, death, disability, divorce, bankruptcy); rights of first refusal on transfers; put rights permitting members to require purchase of their interest; call rights permitting purchase of a member's interest; and dissolution-and-buyout mechanisms triggered by deadlock. Operating agreements lacking these provisions leave the parties to TBOC default rules, which generally do not provide a buyout right. The result: a member who wants to leave a Texas LLC without contractual buyout provisions has limited options, sell to a third party (typically subject to charging-order-only protections that make outside purchase unattractive), wait for the entity to be sold or wound up, or pursue litigation that may or may not produce a buyout-like outcome through derivative claims, fiduciary duty claims, or judicial dissolution. How long does Texas business divorce litigation take? A contested business divorce typically takes 18 to 36 months from filing to final resolution, with significant variance based on the complexity of the matter and the venue. Discovery is typically extensive, financial records, communications, governance documents, third-party records, and expert analysis are all in play, and frequently requires court intervention to compel compliance. Depositions often involve all of the principals and key business personnel, extending over months. Pretrial motion practice, including motions for summary judgment, motions to compel, motions in limine, and Rule 202 petitions in earlier stages, is generally heavy. Texas's specialized Business Court system, which began hearing cases in 2024, provides an alternative forum for complex commercial cases meeting jurisdictional thresholds. Some business divorces resolve through mediation or settlement during litigation; others proceed to trial. Once tried, appellate review can extend the timeline by additional years. Many business divorces are settled because the cost and disruption of multi-year litigation exceed the value of the contested issues, particularly where the underlying business is operating during the litigation and accumulating both the contested value and the ongoing legal costs. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Business Divorce Judicial Dissolution Shareholder Oppression Derivative Action Charging Order Member Manager Company Agreement For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Your Business Partner Wants Out Read The structural decisions are made before the petition. The first conversation takes fifteen minutes. Whether the right path is litigation, negotiated buyout, structural change, or another option depends on facts the working session will surface. Schedule a Call (682) 529-7177 This article describes the structure of contested partner, shareholder, and LLC disputes in Texas at a general level and is not legal advice for any specific situation. The legal theories, available remedies, and procedural requirements in any specific business divorce are fact-intensive and depend on the entity type, governing documents, and circumstances involved. Statutory citations and case law references reflect Texas law as of the publication date and are subject to change. Consult Texas-licensed counsel before making decisions in any specific matter. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Commercial Leases in Texas: What Your Landlord's Attorney Already Knows URL: https://kraus.law/insights/commercial-leases-texas/ Real Estate May 26, 2026 11 min read Commercial leases in Texas: what your landlord's attorney already knows (and you should too). Every commercial lease in Texas is drafted by the landlord's counsel to favor the landlord. Ten clauses that most tenants sign without understanding, each with the red flag buried in the default language and what a prepared tenant asks for instead. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Real Estate If you read nothing else A commercial lease is not a form. It is a 5-to-10-year business constraint drafted by an attorney who has done this a hundred times, for a client who does it every day. The three provisions that cost Texas tenants the most: an unlimited personal guarantee on a failing business; CAM charges with no cap and no audit right; and a lease with no assignment clause when you try to sell. All three are negotiable. None of them are obvious to a first-time tenant reading a 40-page document at midnight before a move-in deadline. Ten clauses are analyzed below, each with the red flag in the default language and what a prepared tenant asks for instead. Call us: (682) 529-7177 Commercial real estate in Texas is a landlord's market in most submarkets, most of the time. That means the initial draft of your lease reflects the landlord's interests, not yours. It also means that most provisions are negotiable, landlords want to lease their space, and a creditworthy tenant with counsel has more leverage than they typically exercise. What follows is a clause-by-clause walkthrough of the ten provisions that matter most. For each one: what the default language says, why it favors the landlord, and what a prepared tenant asks for instead. The ten clauses Clause 01 NNN vs. Gross Lease Structure Red flag The lease is labeled "NNN" but the definition of operating expenses is broad enough to include capital expenditures, property management fees above market rate, and costs from vacancies in adjacent suites. Your stated rent is $22/SF. Your actual occupancy cost after the first reconciliation is $31/SF. Negotiate Get a clear written schedule of what is and isn't included in operating expenses. Exclude capital expenditures (roof replacement, HVAC system overhauls, these are ownership costs, not operating costs). Cap management fees at market rate. Require the landlord to use total leasable area, not occupied area , as the denominator for your pro-rata share calculation. Clause 02 Personal Guarantee Scope Red flag The guarantee is unlimited, covers the full remaining lease term, and survives the business entity's bankruptcy or dissolution. If the business fails in year three of a seven-year lease, you personally owe four years of rent. The guarantee does not expire even if you pay on time for five consecutive years. Negotiate Push for a "good guy" clause : your personal liability terminates if you vacate and surrender the space in good condition with advance notice. Alternatively, cap the guarantee at 12–18 months of base rent, or add a burn-down provision that reduces the guaranteed amount after each year of on-time payments. A letter of credit in lieu of a personal guarantee is worth exploring for creditworthy tenants. Clause 03 CAM Reconciliation & Caps Red flag CAM estimates are set at signing. Actual costs are reconciled annually. There is no cap on year-over-year increases, no audit right, and no definition of what constitutes "controllable" versus "uncontrollable" expenses. In year two, landscaping, security, and parking lot resurfacing push your CAM bill 22% above the estimate. Negotiate Cap annual CAM increases on controllable expenses (typically 3–5% per year). Get an explicit right to audit the landlord's CAM calculations within 90–180 days of receiving the annual reconciliation. Exclude from CAM: capital expenditures, reserves exceeding actual expenses, costs covered by insurance, and expenses for other tenants' buildouts. Clause 04 Assignment & Subletting Red flag The lease requires landlord consent for any assignment or sublease, with no standard of reasonableness. When you find a buyer for your business, the landlord refuses to consent without a rent increase and a new personal guarantee from the buyer's principals. The deal falls apart. The lease survives. Negotiate Add "consent not to be unreasonably withheld, conditioned, or delayed ", and define what unreasonable means (creditworthy buyer, same or better use). Carve out assignments to affiliates and related entities as permitted transfers requiring notice only . Most critically: get an explicit right to assign in connection with a sale of all or substantially all business assets to a qualified buyer, without landlord consent, subject to assumption of lease obligations. Clause 05 Tenant Improvement Allowance Red flag The TI allowance is mentioned in the letter of intent but not included in the lease body, only in an exhibit that's subject to change. Disbursement conditions are vague. Any unused TI funds revert to the landlord at lease commencement, whether or not the buildout is complete. The landlord controls the contractor selection. Negotiate The TI allowance must be in the lease body , not just an LOI or exhibit. Define disbursement conditions with specificity (lien waivers, completion certificates, draw schedule). Any unused TI funds should be available as rent credits or direct payment , not reverting to the landlord. If the landlord controls the contractor, specify the approval process for bids and change orders. Get realistic cost estimates before signing, if your buildout exceeds the TI, the overage is yours. Clause 06 Holdover Penalties Red flag The holdover rate is 200% of the final lease rate, month-to-month, terminable by the landlord on 30 days' notice. If you're 45 days late finding a new space at lease expiration, you've paid two months at double rate and can be forced out on a month's notice during your most vulnerable moment. Negotiate Push the holdover rate to 110–125% for the first 60 days , escalating to 150% thereafter. Get a minimum holdover notice period of 60 days before the landlord can terminate. Better: negotiate a formal short-term extension option , a right to extend for 3 or 6 months at a specified rate, exercisable 6–9 months before expiration, so holdover provisions become a backstop rather than a starting point. Clause 07 Exclusivity & Radius Restrictions Red flag The landlord's form contains a radius restriction: if you open another location within five miles of the leased premises, the landlord can terminate the lease or impose a penalty. For a growing business planning a second location, this provision is invisible at signing and catastrophic 18 months later. Negotiate If the lease contains a radius restriction, eliminate it or reduce the radius to something workable (one mile vs. five). If you are negotiating an exclusivity clause , your right to be the only tenant in your category, get it defined with precision: what products or services are covered, what happens if the landlord violates it (rent abatement, termination right), and how new tenants are screened. An exclusivity clause with no remedy is not worth the paper it's on. Clause 08 Force Majeure Red flag The force majeure clause was last updated in 2018. It excuses the landlord's performance obligations (maintenance, access, HVAC) in cases of government action or pandemic but does not excuse the tenant's rent obligations. When a government order prevents your business from opening, the rent runs regardless. Negotiate Post-2020, this clause requires specific attention. Push for symmetric force majeure , if the landlord's obligations are excused by a government order or declared emergency, the tenant's rent obligations are proportionally reduced for the duration of the impairment. At minimum, add a rent abatement provision for any period in which government orders prohibit the tenant's permitted use, tied to actual occupancy restrictions rather than complete closure. Clause 09 Early Termination Right Red flag The lease contains no early termination right. The business contracts significantly in year four of a seven-year lease. There is no exit. The tenant can try to sublease (subject to landlord consent) or negotiate a lease buyout, both of which favor the landlord entirely because there is no alternative. Negotiate Add a termination option exercisable at mid-term (e.g., at the end of year three in a five-year lease) with 6–9 months' advance written notice and a termination fee limited to unamortized TI and leasing commissions only , not a penalty. The longer the notice period, the lower the fee. For businesses with meaningful growth uncertainty, this option is worth the rent premium it takes to negotiate, because the cost of getting out of a lease you can't use without one is always higher. Clause 10 Co-Tenancy Clause Red flag The retail tenant leases adjacent to a major anchor in a shopping center. The lease contains no co-tenancy provision. Three years in, the anchor closes. Foot traffic drops 60%. The tenant's sales decline but the rent runs at the same rate for the remaining four years of the term. There is no remedy. Negotiate For retail tenants in multi-tenant centers, require a co-tenancy clause that provides: a rent reduction (typically 50% of base rent) if a named anchor vacates and is not replaced within 90–180 days; a termination right if the anchor vacancy persists beyond 12 months; and an occupancy floor , if overall center occupancy drops below 75–80%, similar remedies apply. Define the anchor by name and by category so that replacement by a substantially different use doesn't satisfy the clause. The clause that connects all ten Every provision above has a common thread: the default lease language allocates risk to the tenant, and the negotiated language redistributes it. Most landlords accept these modifications for creditworthy tenants with counsel. The question is whether the tenant knows to ask. A lease isn't just a real estate document. It's a business constraint that affects every decision you make for the next five to ten years. I've been in acquisitions where the lease was the hardest part of the deal, not because of the business, not because of the price, but because an anti-assignment clause with a cooperative landlord turned a two-week process into a three-month negotiation that nearly killed the transaction. I've seen businesses that outgrew their space in year two, locked in for five years with no early termination right and no subletting flexibility. The lease was negotiated on the landlord's form, by a business owner who was excited to open and didn't want to slow the process down. Commercial lease review is not a luxury. It is the single most impactful legal investment most businesses make relative to the cost of the alternative. A lease attorney reviewing a 5-year, 3,000 SF office lease costs a fraction of one month's rent, and the modifications they negotiate typically save multiples of that over the lease term. What to do before you sign The sequence matters. The letter of intent is where the commercial terms are set, rent, term, TI allowance, exclusivity, and any major business-side protections. Once the LOI is signed and the landlord starts the lease drafting, your ability to negotiate fundamental terms is significantly reduced. The LOI negotiation is the leverage point. After the LOI, the lease document is a 30–50 page legal instrument that modifies, qualifies, and expands on the commercial terms. This is where an attorney earns the fee. The lease will contain provisions that aren't in the LOI at all, holdover penalties, CAM methodologies, force majeure, assignment restrictions, and those provisions are all subject to negotiation before execution. If you are the tenant, you should have counsel review the lease before you sign it, not after. The lease runs for years. The decisions in it run with it. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help A lease is a business constraint, not just a real estate document. Acquisitions and restructurings regularly reveal that the lease is the most complicated piece of the deal — not the financials, not the IP — because of an anti-assignment clause, a personal guaranty, or a co-tenancy condition that the parties forgot was in there. Effective lease review requires understanding the business context the lease operates within, not just the real estate terms. When a lease matter requires specialized real estate counsel, Scale LLP's real estate attorneys handle it. The business and transactional strategy stays coordinated through one relationship. One call starts the conversation. Schedule a Call Going deeper Questions I hear from Texas business owners before signing a commercial lease. What is the difference between a NNN lease and a gross lease in Texas? In a triple net (NNN) lease, the tenant pays base rent plus property taxes, building insurance, and CAM costs. In a gross lease, the landlord pays all operating expenses out of the rent; your payment is fixed and predictable. Modified gross leases fall between the two. Most Texas retail and office leases are some form of NNN or modified gross. The critical point is not the label, it's which specific expenses the tenant pays, how they're calculated, how they're reconciled annually, and whether the landlord can pass through capital expenditures as operating costs. The math matters more than the name. What is a personal guarantee in a commercial lease and can I avoid it? A personal guarantee makes you individually liable for the lease if the business entity fails to pay. Landlords routinely require them from smaller businesses. Avoiding one entirely is difficult for most tenants. What is negotiable: limiting the guarantee to 12 months of rent rather than the full term; a "good guy" clause that terminates your personal liability if you vacate in good condition; a sunset provision that eliminates the guarantee after a period of on-time payments; or a letter of credit in lieu of a personal guarantee. The landlord's starting position, unlimited personal guarantee, full term, is a starting point, not a final offer. What is CAM reconciliation and how does it affect my actual rent? CAM reconciliation is the annual calculation of actual operating costs versus the estimated monthly payments you made throughout the year. If actual costs exceeded estimates, you owe a true-up. Key negotiation points: a cap on annual CAM increases on controllable expenses (typically 3–5%); the right to audit the landlord's calculations; exclusions from CAM for capital expenditures, above-market management fees, and costs for other tenants; and a clear definition of the denominator used to calculate your pro-rata share (occupied vs. total leasable area). Can my landlord prevent me from assigning or subletting my Texas commercial lease? Standard commercial lease language gives landlords broad discretion to refuse an assignment with no explanation required. Texas law does not imply a reasonableness standard unless the lease expressly provides one. Negotiate: "consent not to be unreasonably withheld, conditioned, or delayed"; a deemed-approval provision if the landlord doesn't respond within 15–30 days; the right to assign to affiliates without consent; and, critically, the right to assign in connection with a sale of the business to a qualified buyer without landlord consent, subject to assumption of lease obligations. What is a tenant improvement allowance and how should it be structured? A TI allowance is a dollar amount (typically per square foot) the landlord contributes toward building out the space. The amount and structure are both negotiable. The allowance must be in the lease body, not just an LOI. Disbursement conditions should be clearly defined. Unused TI funds should be available as rent credits or cash, not reverting to the landlord. If the landlord controls the contractor, specify the bid and change order approval process. In a tight market, higher TI often comes with higher base rent that amortizes the cost over the lease term, model both before deciding. What happens if I stay past the end of my commercial lease in Texas? Holding over past lease expiration typically triggers a month-to-month tenancy at 125–200% of the final lease rate, terminable by the landlord on 30 days' notice. If the landlord has a new tenant ready and your holdover prevents it, you may be liable for their damages. The solution: begin renewal negotiations 6–12 months before expiration and negotiate a formal short-term extension option rather than relying on holdover provisions. What is a co-tenancy clause and does my lease need one? A co-tenancy clause protects a retail tenant whose business depends on an anchor tenant or overall occupancy in the center. It provides rent reduction or a termination right if the anchor leaves or occupancy falls below a threshold. Landlords never offer these voluntarily, you must negotiate them. Key terms: the specific anchor or occupancy threshold that triggers the clause; the remedy (reduced rent, termination right, or both); the cure period; and the duration of the remedy. For retail tenants in multi-tenant centers, this is one of the most valuable available provisions and one of the most frequently omitted. What should a Texas commercial lease say about early termination? Most leases as drafted contain no early termination right, you're locked in for the full term. Adding one requires specific negotiation. A typical provision: you may terminate at mid-term with 6–9 months' advance written notice and a termination fee limited to unamortized TI and leasing commissions, not a penalty. The longer the notice period, the lower the fee; 12 months' notice sometimes eliminates the fee entirely. For businesses with meaningful uncertainty, this option is worth the premium it takes to negotiate in. Getting out of a lease you can't use without one is always more expensive. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Commercial Lease Statute of Frauds Force Majeure Liquidated Damages Guaranty Agreement Choice of Law / Choice of Forum For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Real Estate at Scale LLP Explore Selling Your Business in Texas: The Owner's Roadmap Read Texas Business Law Explore Before you sign, know what you're signing. A lease review costs a fraction of one month's rent. The modifications negotiated typically save multiples of that over the lease term. Schedule a Call (682) 529-7177 This article provides general information about commercial lease provisions under Texas law and is not legal advice for your specific situation. Every commercial lease involves unique terms, market conditions, and business circumstances. Before signing a commercial lease, consult an attorney licensed in your jurisdiction. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Contract Disputes in Texas: When to Fight, When to Settle, and What Happens in Between URL: https://kraus.law/insights/contract-disputes-texas/ Litigation · Corporate June 23, 2026 10 min read Contract disputes in Texas: when to fight, when to settle, and what happens in between. Every contract dispute moves through predictable stages, with costs and leverage that shift at each one. Understanding the escalation ladder, from demand letter through trial, is what separates a business owner who settles well from one who spends $200,000 to recover $80,000. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Litigation Corporate If you read nothing else Texas has a fee-shifting statute for written contract claims, the winning party can recover attorney's fees from the loser under Chapter 38. That changes the math on every dispute: a creditor with a strong written contract claim and documented damages has significantly more leverage than one relying on an oral agreement or a trail of emails. Three things that determine whether fighting is worth it: the strength of the written contract; whether damages are provable with specificity; and whether the other party can pay a judgment. The escalation ladder below shows what each stage costs, how long it takes, and what the decision point is. Call us: (682) 529-7177 Being right is not enough. In contract litigation, being right is the starting point, not the destination. You need a strong contract, provable damages, a solvent defendant, and enough patience and resources to reach the resolution. Miss any one of those, and the dispute that felt like a matter of principle becomes a lesson in the economics of litigation. Here is what each stage of a Texas contract dispute looks like, not the legal theory, but the practical reality of cost, timeline, and leverage at each rung of the ladder. The escalation ladder Every dispute moves through stages. Each one raises the stakes and the cost for both parties. Most disputes resolve before they reach the later rungs, not because the underlying claim was weak, but because rational actors weigh the cost of continuing against the benefit of resolution. Understanding where you are on this ladder is the first job of a litigation attorney advising on a new dispute. Stage 1, Pre-Litigation Demand letter and direct negotiation $500 – $3K 1 – 4 weeks A written demand letter, drafted by counsel, formally asserts the claim, specifies the amount owed or the action demanded, and establishes a response deadline. In Texas, this step is a prerequisite for attorney's fee recovery under Chapter 38, the demand must be presented and the opposing party must fail to tender within 30 days before fee-shifting applies. Beyond the procedural requirement, a demand letter from counsel signals seriousness and produces responses that informal requests do not. Direct negotiation between the principals, ideally with counsel advising both sides, frequently resolves disputes at this stage. The parties know the facts better than any attorney or judge will, and the cost of continuing is not yet significant enough to make either side irrational. Decision point Does the other party respond with a credible offer, a denial, or silence? A credible offer opens negotiation. A denial requires evaluating whether their position has merit, sometimes it does. Silence is not a defense; it is usually either a stalling tactic or a signal that they're evaluating whether you'll follow through. Stage 2, Early Litigation Filing, answer, and initial case assessment $8K – $25K 1 – 3 months The petition or complaint is filed. The opposing party is served and has 20 days (Texas state court) or 21 days (federal court) to file an answer. An unanswered petition results in a default judgment , an automatic win on liability, followed by a prove-up hearing on damages. Most defendants answer; the answer sets up the contested litigation that follows. Early motions, including a motion to dismiss for failure to state a claim, or a plea to the jurisdiction, are evaluated and filed if warranted. Both parties issue a litigation hold to preserve relevant documents. A scheduling order sets the timeline for discovery, motions, and trial. This is when both sides make a realistic assessment of the other party's case, and when the first serious settlement conversation typically occurs. Decision point What does the initial case assessment show? Is the claim strong on the merits, and are the damages provable? Can a motion to dismiss dispose of any claims before discovery costs mount? Mediation at this stage , before discovery, produces the most cost-efficient resolutions when both sides have enough information to negotiate intelligently and not yet enough invested to become entrenched. Stage 3, Discovery Documents, depositions, and the case on paper $40K – $150K 4 – 12 months Discovery is where disputes become expensive and where the facts, not the allegations, determine the trajectory. Each side produces documents, answers written interrogatories, and sits for depositions. What emerges from discovery is often different from what either side believed at the outset: emails that contradict the narrative, performance records that undercut the damages claim, communications that show notice was given or wasn't, or internal documents that suggest the breach was anticipated and tolerated. Depositions are the fulcrum. A deposition of the opposing party's key witness, conducted well, either confirms your case or reveals its vulnerabilities. The post-deposition period is frequently when the most realistic settlement numbers emerge, because both sides now know what a jury will see. Expert witnesses are identified, retained, and disclosed in this phase. In contract disputes, damages experts (accountants, economists, industry specialists) are often required to establish lost profits, diminished value, or the cost of cover with the specificity Texas courts require. Decision point After depositions and document production, what does the case look like? Not what you believed at filing, what the evidence shows. A case that looked strong on the pleadings sometimes looks different when the other party's documents are in hand. This is the most valuable point for an objective case evaluation, and the most common moment for a case to settle at a number that reflects reality rather than aspiration. Stage 4, Dispositive Motions Summary judgment and pre-trial winnowing $15K – $40K 2 – 4 months After discovery closes, either party can move for summary judgment, asking the court to rule as a matter of law on claims or defenses where there is no genuine dispute of material fact. A successful summary judgment motion ends the case, or significantly narrows it, without a trial. In contract disputes, motions for summary judgment are frequently filed on issues where the contract language is unambiguous and the breach is undisputed. No-evidence motions in Texas state court allow a party to challenge specific elements of the opposing party's claim by asserting there is no evidence to support them. The burden shifts to the non-movant to produce evidence raising a fact issue. This mechanism is a cost-effective way to eliminate claims or defenses that lack evidentiary support before the expense of a full trial. Decision point The court's ruling on summary judgment is a powerful signal. A full denial , all claims survive, means trial is coming and both sides should price it accordingly. A partial grant typically reshapes the settlement calculus immediately. The economics of the case after summary judgment are different from before it, and both parties' attorneys will recalibrate. Stage 5, Trial Jury or bench, verdict, and judgment $100K – $400K+ 3 – 10 days of trial Approximately 95% of Texas commercial cases resolve before trial. The cases that reach a jury are those where the parties' assessments of value diverged too widely to bridge through negotiation, or where one party had non-monetary reasons to fight, precedent, principle, or the belief that a public verdict would affect their reputation or future relationships. Trial preparation begins months before the first day in court: exhibit lists, witness outlines, jury charge preparation, motions in limine to exclude damaging evidence. A Texas jury trial for a commercial contract dispute typically runs three to ten days. Bench trials (before a judge without a jury) are faster and more common for complex commercial matters where credibility determinations are less central. The verdict is not the end: post-trial motions, the entry of judgment, and the collection of any judgment are additional steps. Decision point The question before trial is always the same: what is the range of outcomes, what are the odds of each, what does the expected value look like compared to the best available settlement number, and what is the non-monetary cost of being wrong? These are numbers, not feelings, and they should be calculated explicitly before the first day of trial. What your contract says, and why it changes everything The contract's terms don't just define the underlying obligation. They define the rules of the dispute. Several provisions have outsized influence on how a contract dispute plays out in practice. Contract clauses that reshape the dispute Six provisions and their practical effect when a claim arises Clause Attorney's fee provision Specifies which party (or the prevailing party) is entitled to recover attorney's fees in a dispute. Practical effect A one-way fee provision (only the vendor can recover fees) is dangerous for the client. A mutual prevailing-party provision increases the stakes for both sides and typically incentivizes early resolution. Combined with Texas Chapter 38, a well-structured fee provision can make a strong claim worth pursuing even when the underlying amount is modest. Clause Limitation of liability Caps the maximum damages one party can recover, typically to the contract value or fees paid. Practical effect A cap at the contract value means a $200,000 contract dispute can never produce a $500,000 judgment regardless of the actual harm. This dramatically affects whether litigation is economically rational. Consequential damages waivers , which exclude lost profits and downstream losses, are equally important and frequently overlooked when contracts are signed. Clause Dispute resolution / arbitration Requires disputes to be resolved in arbitration rather than court, sometimes with specified rules and forum. Practical effect Arbitration is faster and more private than litigation but can be equally expensive in complex disputes. AAA commercial arbitration rules apply different costs than JAMS. Arbitration awards are very difficult to appeal. Know before signing whether your contract requires arbitration, which rules govern, and who selects the arbitrator. Clause Notice and cure period Requires written notice of a breach, followed by a defined period to cure before litigation may proceed. Practical effect Failing to give the required notice before filing suit can result in dismissal of the lawsuit . This procedural trap catches plaintiffs who move too quickly. Review the contract for notice requirements, including the method of delivery, before issuing a demand letter or filing a claim. Clause Choice of law and forum Specifies which state's law governs and in which jurisdiction disputes must be brought. Practical effect A contract governed by Delaware law and requiring disputes in Delaware courts may require you to litigate far from home , even if you're a Texas business. For smaller disputes, this practical inconvenience can effectively prevent a claim from being pursued. Review forum clauses before signing any significant agreement with an out-of-state counterparty. Clause Liquidated damages Specifies the amount owed on a particular breach in advance, rather than leaving it to be proven after the fact. Practical effect An enforceable liquidated damages clause simplifies and accelerates the dispute , the amount is predetermined and the fight is only over whether the breach occurred. An unenforceable liquidated damages clause (one courts treat as a penalty) opens the damages question entirely. Texas courts enforce these if they represent a reasonable forecast of actual loss, not a punishment. When fighting is worth it and when it isn't The answer is almost never about the principle. It is about the numbers. The case worth fighting has four characteristics. The contract is written and unambiguous about the obligation that was breached. The damages are specific, documented, and provable with evidence, not speculative, not primarily future losses, not dependent on a jury accepting a complex expert opinion. The defendant is solvent, a judgment against a company with no assets is not a recovery. And the expected value of the litigation outcome exceeds the all-in cost of reaching it, including management time, stress, and the opportunity cost of spending the same resources on something else. The case where settlement makes more sense, even when you're right, is when any one of those four conditions is missing. A strong case against an insolvent defendant. A legitimate breach with damages that are genuinely hard to quantify. An oral contract or a series of emails that established the terms through implication rather than clear language. A technically valid claim where the litigation cost will exceed the recovery range. Winning a contract case and recovering on the judgment are two different events. Know which one you're pursuing. The most expensive mistake in contract disputes is not filing too early or settling too cheap. It is continuing to spend money on a case that the evidence, on an objective assessment, doesn't support, driven by sunk cost, principle, or the belief that a jury will see what you see. A good litigation attorney's job is to tell you what the case is worth, not to validate what you think it's worth. Those are different conversations, and the first one requires a lawyer who will push back. What good contracts do when disputes happen Everything in this article is easier with a well-drafted written contract behind it. The oral agreements and email chains that govern too many Texas business relationships create disputes that are expensive to litigate precisely because the terms must be reconstructed from ambiguous evidence rather than read from a clear document. A well-drafted contract doesn't prevent disputes. It determines who wins them efficiently. It sets the damages framework in advance. It establishes the dispute resolution process. It triggers fee-shifting. And it provides the clear written obligation that Chapter 38 requires for the fee-recovery machinery to operate. The time to think about contract disputes is when the contract is being negotiated, not when the dispute has already begun. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help Effective contract dispute counsel understands both sides of the table. Knowing what each stage of litigation costs — in dollars, time, and business disruption — is what drives sound strategy. The decision to pursue a claim, negotiate a settlement, or walk away depends on the business context as much as the legal merits. That analysis requires counsel who thinks like a business operator, not just a litigator. When a dispute moves to active litigation, Scale LLP's litigation attorneys handle it. The business strategy and settlement analysis stays coordinated through one counsel relationship. One call starts the conversation. Schedule a Call Going deeper Questions I hear from Texas business owners in contract disputes. What do I have to prove to win a breach of contract case in Texas? Four elements: a valid, enforceable contract; plaintiff's performance or a valid excuse for non-performance; defendant's breach of an obligation they were required to perform; and damages caused by that breach. The damages element is where technically valid claims often falter, you must prove what you lost, with reasonable certainty, as a direct result of the breach. Speculative damages are generally not recoverable in Texas. Consequential damages, downstream losses beyond the contract value, are only recoverable if foreseeable at formation and not excluded by a limitation of liability clause. What is the statute of limitations for a contract dispute in Texas? Four years for both written and oral contracts (Texas Civil Practice and Remedies Code §16.004), generally starting from the date of the breach. The discovery rule can delay the clock if the breach wasn't and couldn't have been discovered through reasonable diligence. Fraudulent concealment can toll limitations while the breach is actively hidden. Four years is easier to lose than it sounds, a dispute that simmers through informal negotiations can reach the deadline unexpectedly. If you believe you have a claim, the time to consult an attorney is now, not after a comfortable negotiating period. Does my contract require mediation before I can sue in Texas? Many commercial contracts include dispute resolution clauses requiring mediation, or senior-executive negotiation, before filing suit. Some require arbitration rather than litigation entirely. Failing to follow the contractual dispute resolution process can result in dismissal or stay of the lawsuit. Before filing, review the contract for any mandatory pre-suit notice requirement with a cure period; any mandatory mediation or negotiation step; and any arbitration clause. Arbitration clauses in commercial contracts are broadly enforceable in Texas under both the Texas Arbitration Act and the Federal Arbitration Act. Can I recover my attorney's fees if I win a contract dispute in Texas? Texas follows the American Rule by default, each side pays its own fees. Texas Civil Practice and Remedies Code Chapter 38 is the significant exception: in breach of written contract claims, the prevailing party can recover reasonable attorney's fees if the claimant presented the claim and the opposing party failed to tender within 30 days. This fee-shifting provision changes the economics meaningfully, a creditor with a strong written contract claim who wins may recover both the owed amount and the fees incurred to recover it. The 30-day demand requirement is why a properly structured demand letter is a prerequisite, not optional. What is the difference between a material breach and a minor breach in Texas? A material breach goes to the essence of the contract, it defeats the core purpose or deprives the non-breaching party of the benefit they bargained for. It excuses the non-breaching party from continuing their own performance and entitles them to treat the contract as terminated and sue for all damages. A minor (partial) breach is a failure that doesn't defeat the core purpose, the non-breaching party receives substantially what they bargained for, with some deficiency. It doesn't excuse continued performance but does entitle the non-breaching party to damages for the specific deficiency. Misjudging which you're dealing with is expensive: treating a minor breach as material, and stopping performance, can make you the party in breach. What does 'liquidated damages' mean in a Texas contract? A liquidated damages clause specifies in advance the amount of damages owed for a particular breach, rather than leaving it to be proven after the fact. Texas courts will enforce these if, at the time of formation, the damages from the breach would be difficult to estimate, and the specified amount is a reasonable forecast of actual damages rather than a penalty. A provision that operates as a penalty is unenforceable. If the clause is enforceable, it typically limits recovery to the specified amount: the non-breaching party cannot argue for higher actual damages even if they suffered more. What is a demand letter and do I need one before suing? A demand letter formally asserts the claim, specifies what is demanded, and sets a response deadline. It is not legally required before filing suit in most Texas contract disputes, with one critical exception: Texas Chapter 38 fee recovery requires the claimant to present the claim and give the opposing party 30 days to tender before attorney's fees become recoverable. This makes a proper pre-suit demand letter a procedural prerequisite for fee recovery, not just a courtesy. A demand letter drafted by an attorney signals seriousness, creates a documented record of the dispute, and frequently produces a settlement response that informal requests do not. What happens if the other party ignores my demand letter in Texas? Silence is not a defense, but it often signals either that they believe you won't follow through, or that they are buying time. Your options are: file suit in the appropriate Texas court; initiate arbitration if the contract requires it; or pursue mediation. Court selection depends on the amount in controversy, Justice of the Peace for claims under $20,000, county courts at law for claims up to $250,000 (depending on the county), district courts for claims over $200,000. A follow-up call from litigation counsel often produces a response that the demand letter alone did not. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Statute of Frauds Consideration Representations and Warranties Force Majeure Liquidated Damages Warranty Sale of Goods Choice of Law / Choice of Forum Mediation Arbitration Declaratory Judgment For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Business Litigation at Scale LLP Explore Starting a Business in Texas: The Legal Checklist Read Texas Business Law Explore Know what the dispute is worth before you decide how hard to fight. One call tells you where you are on the ladder, what it costs to climb, and whether the top rung is worth reaching. Schedule a Call (682) 529-7177 This article provides general information about contract dispute resolution in Texas and is not legal advice for your specific situation. Every dispute involves unique facts, contract terms, and circumstances. Cost and timeline estimates are based on typical Texas commercial cases and will vary significantly based on complexity, the parties' behavior, and forum. Consult an attorney licensed in your jurisdiction before taking action in a contract dispute. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Cross-Border Transactions: What U.S./Canada Deals Require URL: https://kraus.law/insights/cross-border-us-canada-transactions/ Cross-Border · U.S./Canada June 28, 2026 12 min read Cross-border transactions: what U.S./Canada deals require. The two systems are similar enough to be deceptive. The structural differences, entity, tax, securities, employment , privacy, show up in places U.S. counsel often does not think to look. Written by an attorney licensed in Texas and Alberta, who has spent years working in both directions. By Charles R. Kraus Partner, Scale LLP Practice areas this article covers Cross-Border Corporate Fractional GC Governance M&A Employment If you read nothing else U.S. and Canadian business law share a common ancestry, which is why the differences between them are so often missed. The systems are similar enough that a U.S. attorney can read a Canadian document. They are different enough that reading is not the same as advising. Three structural facts that drive the most expensive cross-border mistakes: Canadian employment law generally has no at-will doctrine, terminations require notice or pay in lieu, often substantial; the concept of permanent establishment under the U.S.-Canada Tax Treaty determines whether a U.S. business is taxable in Canada and triggers obligations the U.S. CEO usually does not anticipate; and Canadian securities regulation is provincial, which means a single Canadian financing can require compliance with the rules of multiple provinces simultaneously. None of this is exotic. It is structural, and it requires counsel licensed in both jurisdictions to see at the speed cross-border deals move. Call us: (682) 529-7177 This article describes what is different about a U.S./Canada deal compared to a domestic one, at the level of strategic understanding rather than technical detail, so that a Texas business owner can recognize what cross-border counsel needs to be doing and why having both jurisdictions integrated in a single attorney is materially different from translating between two separate firms. The dual-jurisdiction stack Every cross-border transaction operates inside two legal systems simultaneously. The matrix below covers the structural differences across the dimensions that recur in nearly every transaction. None of these are edge cases, they are the recurring questions that a deal will surface. Dual jurisdiction stack Where U.S. and Canadian law structurally differ United States Federal + state Canada Federal + provincial Entity Formation Delaware, Texas, or other state corporations and LLCs. LLC is the default flexible vehicle. S-corp tax election available for closely held corps. Federal CBCA corporations or provincial corporations (OBCA in Ontario, BCBCA in BC). No direct LLC equivalent. Specialized Unlimited Liability Companies (Nova Scotia, Alberta) used for U.S. tax planning hybrids. Corporate Income Tax Federal corporate rate (currently 21%). Pass-through structures (LLC, S-corp) widely used. State corporate tax varies; Texas has no state corporate income tax (margins/franchise tax instead). Federal corporate rate plus provincial corporate rate. Combined rates typically 23–31%. Canadian-Controlled Private Corporations (CCPCs) get a small business deduction reducing tax on initial active business income. Sales Tax / VAT No federal sales tax. State and local sales tax based on nexus rules. Texas: 6.25% state plus local up to 2%. GST/HST applies federally at 5% (GST-only provinces) up to 15% (HST provinces). Quebec adds QST. BC, Saskatchewan, Manitoba have separate provincial sales tax. Registration thresholds apply. Securities Regulation Federal SEC framework with state "blue sky" laws. Regulation D Rule 506(b)/506(c) the primary private placement exemptions. Provincial securities commissions harmonized through the Canadian Securities Administrators (CSA). National Instrument 45-106 governs prospectus exemptions analogous to Reg D, but provincial filings required separately. Employment At-will employment in most states including Texas. Termination without cause generally permissible without notice or severance, subject to anti-discrimination laws. No at-will doctrine. Termination without cause requires reasonable notice or pay in lieu, often months for senior employees, sometimes more than a year. Provincial employment standards set the floor; common law adds further obligations. Privacy & Data Sectoral framework: HIPAA, GLBA, FERPA. State laws (CCPA in California; TDPSA in Texas ). No comprehensive federal privacy law. PIPEDA federally for commercial activities. Provincial privacy laws override in BC, Alberta, and Quebec. Quebec's Law 25 (effective 2022–2024) is the strictest Canadian regime, with penalties up to 4% of global revenue. Trademark USPTO federal registration. Common law rights through use. Lanham Act governs. Canadian Intellectual Property Office (CIPO) registration under the Trademarks Act. Madrid Protocol available for extending U.S. registration. Canadian rights independent of U.S. rights. Withholding Tax (Cross-Border) 30% statutory withholding on U.S.-source income paid to non-residents. Reduced by treaty. 25% statutory withholding on Canadian-source dividends, interest, royalties paid to non-residents. U.S.-Canada Treaty reduces to 5–15% for qualifying recipients. Contract Law System Common law in all states. UCC governs commercial transactions. Common law in nine provinces. Quebec operates under civil law (Civil Code of Québec), which materially affects contract interpretation, formation, and enforcement. The four common deal flow patterns Most cross-border transactions fall into one of four patterns, each with its own primary considerations and characteristic mistakes. Knowing which pattern applies to your situation is the first step in scoping cross-border counsel correctly. USA Canada Outbound Texas business expanding into Canada. Sales to Canadian customers, hiring Canadian employees, opening a Canadian office, or acquiring a Canadian business. Permanent establishment analysis before activity begins GST/HST registration once thresholds are crossed Employment standards compliance for any Canadian employees PIPEDA or provincial privacy compliance for Canadian customer data Investment Canada Act review for acquisitions above thresholds Canada USA Inbound Canadian business entering the U.S. market through a U.S. subsidiary, branch, or acquisition. Often the more complex direction because U.S. structures and tax treatment must be selected from a wider menu of options. U.S. entity selection (Delaware C-corp typical for VC; alternatives for closely held) Cross-border tax structuring including ULC structures where appropriate U.S. employment, payroll, and benefits setup State sales tax nexus analysis U.S. trademark and IP protection separate from Canadian filings USA Canada Bilateral Ongoing cross-border operations , distribution agreements, supply chains, licensing arrangements, joint ventures, or dual-listed structures that operate in both jurisdictions concurrently. Transfer pricing compliance under both countries' rules Coordination of tax withholding under treaty Dual-track contract law analysis (especially where Quebec is involved) Cross-border IP licensing structures Currency and FX exposure management M&A Diligence Transaction Acquisitions in either direction requiring full bilateral diligence, structuring, tax analysis, regulatory clearances, and integration planning. Concurrent legal diligence in both jurisdictions Cross-border tax structuring (often the most consequential decision) Investment Canada Act review for inbound acquisitions of Canadian businesses HSR Act review for transactions meeting U.S. thresholds Integration of two distinct corporate, employment, and IP regimes post-close The five things U.S. counsel typically misses Below are the recurring patterns I have seen, patterns where a Texas business owner working with U.S.-only counsel discovers, often during diligence or after a regulatory inquiry, that something has been missed. None of these are obscure. They are the predictable consequences of operating across a border with a single-jurisdiction lens. 1 Permanent establishment created without anyone realizing The single most consequential cross-border tax concept, and the one most often missed. A Texas business hires a Canadian sales representative who works from home, attends client meetings, and has authority to negotiate terms. Under the U.S.-Canada Tax Treaty, this is a permanent establishment, and the business is now taxable in Canada on the profits attributable to it, owes Canadian payroll obligations on the employee, and may have GST/HST registration and filing obligations. None of this was the intent. All of it follows from facts the CEO did not flag as cross-border activity. 2 Termination of a Canadian employee on at-will assumptions A Texas business with Canadian employees terminates one of them without cause. The U.S. playbook applies: short notice, modest severance if any, signed release. Within weeks, the company receives a wrongful dismissal claim alleging the notice period was inadequate. Canadian common law reasonable notice for a senior employee with significant tenure can run six months to over a year of compensation. Provincial employment standards set the statutory floor, but common law typically goes well above it. The settlement to resolve the claim often costs multiples of what proper notice would have cost. 3 A Canadian financing structured as if it were a Reg D deal A Canadian company raises capital from a mix of Canadian and U.S. investors. U.S. counsel structures the offering under Regulation D. The Canadian portion is treated as an afterthought. The result: securities sold in Ontario without proper reliance on a National Instrument 45-106 exemption, requiring filings with the Ontario Securities Commission that were not made. Curing a Canadian securities violation after the fact is significantly more expensive than structuring the offering correctly across both jurisdictions from the start. 4 Canadian privacy obligations triggered by ordinary commercial activity A Texas SaaS company begins collecting Canadian customer data, emails, payment information, usage data. Under PIPEDA and provincial laws, the company has compliance obligations that have no domestic equivalent: documented privacy policies meeting Canadian standards, data retention rules, breach notification requirements, and in Quebec, the heightened obligations of Law 25 with penalties up to 4% of global revenue. The first sign of trouble is often a Canadian regulatory inquiry , at which point the compliance posture must be retroactively constructed. 5 Quebec treated as a province like any other Quebec operates under a civil law system, requires French-language compliance for consumer-facing materials, has its own privacy regime (Law 25), its own consumer protection statute, and contract law that does not assume the same defaults as common-law provinces. A standard distribution agreement that works fine in Ontario or BC may need material modification for Quebec, particularly in consumer-facing arrangements. Treating Quebec as just another Canadian market is a recurring source of unexpected obligations , often discovered when consumer complaints reach Quebec's Office de la protection du consommateur. The two systems are not competing legal traditions. They are independent legal systems that share a vocabulary. The vocabulary is the trap. What integrated cross-border counsel does differently The structural advantage of bilateral counsel, counsel licensed in both jurisdictions, is not faster turnaround or lower cost, although both can be true. It is the integration of analysis at the level where the two systems interact. When a Texas company is acquiring a Canadian target, separate U.S. and Canadian counsel each produce thorough analysis on their side. Each side answers the questions they were asked. Each side produces work product that is correct within their jurisdiction. The integration, how the deal structure interacts with the U.S.-Canada Tax Treaty, where Canadian employment liabilities show up in U.S. acquisition accounting, how Canadian privacy obligations flow through to U.S. parent company governance, happens through translation between the two firms, mediated by the client. The translation step is where context is lost, where assumptions get made, and where the cost of a missed consideration is highest. Bilateral counsel performs the integration directly. The same attorney who is reading the Canadian share purchase agreement is also designing the U.S. acquisition structure that will receive the Canadian target. The same attorney who is advising on the Canadian employment transition is also advising on the U.S. compensation structure that will replace it. The same attorney who is structuring the Canadian securities offering is also coordinating it with the parallel U.S. exemption. Each consideration is being analyzed in the context of both jurisdictions simultaneously, not sequentially. This is not always the right structure. For very large transactions, where deep specialist expertise is required on both sides, separate firms may be unavoidable. For most Texas businesses with cross-border activity, bilateral counsel as the lead with specialist firms engaged for specific matters is the structure that produces the best result at the lowest total cost. When you need cross-border counsel The threshold question for a Texas business is not whether the transaction is "cross-border" in name, but whether the activity creates obligations in both jurisdictions. The activities below typically do. Hiring an employee or independent contractor in Canada, particularly one with sales authority, creates Canadian employment, payroll, and potentially permanent establishment obligations. Selling goods or services to Canadian customers above provincial GST/HST registration thresholds triggers Canadian sales tax registration and collection obligations. Acquiring a Canadian business or assets requires Canadian legal diligence, regulatory analysis under the Investment Canada Act and Competition Act for transactions above specific thresholds, and tax structuring. Raising capital from Canadian investors requires compliance with Canadian provincial securities laws in addition to U.S. exemptions. Storing or processing Canadian customer data, which most digital services do automatically, triggers PIPEDA and provincial privacy obligations. Opening a Canadian office, branch, or subsidiary creates a permanent establishment by definition and triggers the full set of Canadian compliance obligations. Licensing intellectual property to or from a Canadian counterparty requires both jurisdictions' analysis on tax withholding, IP enforcement, and treaty compliance. For Texas businesses where any of these are current activities or plans for the next twelve months, the cost of cross-border counsel is significantly less than the cost of discovering, in diligence or in regulatory inquiry, that a structural obligation has been missed for years. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn Engagement Bilateral counsel from one attorney, in one conversation. I am licensed in Texas, Minnesota, and Alberta . The cross-border work my practice handles runs across U.S. companies expanding into Canada, Canadian businesses entering the U.S. market, M&A transactions in either direction, and ongoing bilateral operations. The integration is the point, both jurisdictions analyzed concurrently rather than translated between separate firms. For matters that require deep specialist work in either jurisdiction, patent prosecution, complex tax structuring, jurisdiction-specific litigation, I coordinate with the appropriate specialists. The cross-border lead and the integration responsibility stay in one place. That is the structural difference from the dual-firm model. The first conversation is fifteen minutes. It tells you whether your situation needs cross-border counsel at all, and if it does, what the structure should look like. Schedule a Call Going deeper Questions I hear from Texas business owners with U.S./Canada activity. What is a cross-border transaction between the U.S. and Canada? Any business arrangement that involves the laws, regulators, or tax authorities of more than one country, in the U.S./Canada context, deals that touch both jurisdictions in ways that require attention to each country's distinct legal and regulatory framework. Common cross-border transactions include acquisitions in either direction, expansion of operations across the border, supply, distribution or licensing arrangements, cross-border financings, and joint ventures. The transaction is "cross-border" even when the activity appears straightforward, a U.S. SaaS company selling to Canadian customers can trigger Canadian tax registration, GST/HST collection, and privacy compliance obligations that have no equivalent in domestic transactions. Is Canadian business law similar to U.S. law? Canadian and U.S. business law share a common ancestry in English common law and produce broadly similar concepts. The similarity is precisely what makes cross-border work risky for U.S. counsel without bilateral experience. Concepts that look the same often have different statutory frameworks, different regulatory bodies, and different default rules. Canadian corporations can be incorporated federally or provincially, with different governance and tax implications. Quebec operates under civil law rather than common law. Canadian employment law generally requires reasonable notice or pay in lieu, the U.S. concept of pure at-will employment does not exist in most Canadian provinces. Canadian securities law operates through provincial regulators rather than a single federal regulator. The systems are similar enough that experienced U.S. counsel can read a Canadian document. They are different enough that reading is not the same as advising. Do I need a Canadian lawyer if my Texas business is doing a deal with a Canadian company? Yes, Canadian-licensed counsel is required for any matter that involves opining on or filing under Canadian law: incorporating a Canadian entity, registering Canadian securities, providing tax opinions on Canadian taxation, advising on Canadian employment matters, conducting Canadian litigation, registering Canadian intellectual property. Giving legal advice on Canadian law without a Canadian license is the unauthorized practice of law in Canada. The structural question is how the cross-border counsel relationship is organized. The most efficient approach for a Texas business with cross-border exposure is engaging counsel licensed in both jurisdictions who can integrate the analysis directly, rather than acting as translator between U.S. counsel and a separate Canadian firm. The translator structure works but adds cost, time, and friction. What is the USMCA and how does it affect my U.S./Canada business deal? The USMCA, the United States-Mexico-Canada Agreement, replaced NAFTA effective July 1, 2020, and is the trilateral trade agreement governing trade and investment among the three countries. It preserves much of the duty-free goods movement that NAFTA established, with updated rules around digital trade, intellectual property protection, labor standards, and rules of origin. For most cross-border business transactions, the most relevant provisions concern tariff treatment for qualifying goods, dispute resolution mechanisms, and certain investor protections. Manufacturing, agriculture, and dairy operations should pay close attention to rules of origin and quota provisions. Service businesses and technology companies may find the USMCA largely a background framework. The agreement does not replace the need for compliance with each country's distinct domestic laws. What are the key tax considerations in U.S./Canada cross-border deals? Three considerations dominate. The U.S.-Canada Tax Treaty governs how cross-border income is taxed and provides reduced withholding rates on dividends, interest, and royalties, typically 5% to 15% under the treaty versus the 25% Canadian default. The concept of permanent establishment determines whether a U.S. business is taxable in Canada (and vice versa) on its business profits, generally, a fixed place of business or a dependent agent with authority to bind the company creates a permanent establishment and triggers tax filing obligations. GST/HST applies to most goods and services consumed in Canada, including digital products and SaaS subscriptions to Canadian customers above certain thresholds. Tax structuring requires coordination between U.S. counsel, Canadian counsel, and tax advisors on both sides, this is one of the most expensive areas to handle by translation between separate firms rather than through integrated cross-border counsel. How do securities laws differ between Texas and Canada? U.S. securities regulation is primarily federal, administered by the SEC, with state "blue sky" compliance layered on. Canadian securities regulation is the inverse: primarily provincial, administered by each province's securities commission, with the Canadian Securities Administrators providing harmonization. A cross-border securities offering must comply with the rules of every jurisdiction in which securities are offered or sold. National Instrument 45-106 governs Canadian provincial prospectus exemptions analogous to the U.S. Regulation D framework. The accredited investor concept exists in both systems but the definitions differ, a U.S. accredited investor is not automatically an accredited investor in Canada. For private placements that touch both countries, counsel must structure the offering to qualify under exemptions in every applicable jurisdiction simultaneously. What is permanent establishment and why does it matter? Permanent establishment is the tax-law concept that determines when a business is taxable in a foreign country. Under the U.S.-Canada Tax Treaty, a U.S. business has a permanent establishment in Canada if it has a fixed place of business there, an office, branch, factory, workshop, or dependent agent with authority to conclude contracts on behalf of the business. If a permanent establishment exists, the business is taxable in Canada on the profits attributable to it, must register with the Canada Revenue Agency, and must file Canadian tax returns. The treaty defines specific exclusions: storage facilities used solely for delivery, purchasing offices, preparatory or auxiliary activities. The line is fact-specific. A Texas business selling SaaS subscriptions to Canadian customers from a Texas office, with no Canadian employees, typically does not have a permanent establishment. A Texas business that hires a Canadian sales representative with authority to negotiate and close deals typically does. Permanent establishment analysis should be done before significant Canadian business activity begins, not after. Do U.S. trademarks protect my brand in Canada? No. U.S. and Canadian trademark systems are independent. A U.S. federal trademark registration provides rights only in the United States. Trademark protection in Canada requires either common law rights established through actual use in Canada, or registration with the Canadian Intellectual Property Office (CIPO) under the Trademarks Act. Canada amended its trademark law in 2019 to align with international norms, including the Madrid Protocol, which means a U.S. business can extend its U.S. trademark registration to Canada through a Madrid Protocol filing rather than filing a separate Canadian application. The Madrid Protocol approach is generally more efficient than parallel applications. For Texas businesses with Canadian customers or planned Canadian expansion, the practical sequence is: file the federal U.S. trademark first; verify the mark is available in Canada through a clearance search; and file a Madrid Protocol or direct CIPO application before the brand has significant Canadian traction. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Foreign Entity Choice of Law / Choice of Forum Registered Agent Asset Purchase Stock Purchase Due Diligence Indemnification (M&A) Escrow For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Cross-Border Transactions, engagement details Explore Raising Capital in Texas: SAFEs, Notes, and What Investors Want Read Selling Your Business in Texas Read If your business is on both sides of the border, the counsel relationship should be too. Fifteen minutes is enough to determine whether your situation needs cross-border counsel and what the right structure looks like. Schedule a Call (682) 529-7177 This article describes structural differences between U.S. and Canadian business law and is not legal advice for any specific situation. Cross-border legal questions depend significantly on the specific facts, jurisdictions, and industries involved. The information presented reflects the legal frameworks as of the publication date; tax rates, treaty provisions, and regulatory requirements are subject to change. Consult counsel licensed in the relevant jurisdictions before making decisions in cross-border matters. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Data Breach Response: The First 72 Hours URL: https://kraus.law/insights/data-breach-response/ Litigation · IP June 30, 2026 10 min read Data breach response: the first 72 hours. A breach is a legal event before it is a public one. The decisions made in the first three days, what to preserve, who to call, and what not to say, determine whether the incident stays contained or becomes a multi-year liability. Here is the sequence, the deadlines, and the structural choice that most businesses get wrong. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Litigation IP · Data If you read nothing else The most important decision in a breach response has nothing to do with notification or remediation. It is this: retain outside counsel first, and have counsel engage the forensic investigators. Communications between you and your attorney are privileged. The forensic report, documenting how the breach happened, what was taken, and what security failures allowed it, may be protected as attorney work product. The same report prepared without a counsel-directed structure is discoverable by every plaintiff's attorney who files suit. That document drives liability. Keeping it privileged is a structural choice made in the first hour, and it cannot be undone after the fact. Call us: (682) 529-7177 A data breach creates simultaneous obligations running in different directions: legal holds, regulatory notifications, contractual obligations to business partners, insurance notice requirements, and potential civil liability to affected individuals. None of them can be managed reactively. The businesses that get through a breach with minimum liability are the ones that treated it as a legal event from the moment of discovery, not a technology problem or a communications problem that legal would eventually review. What follows is the sequence: what happens at each stage, what the legal obligations are, and what the structural decisions are that can't be revisited once made. The response clock Breach response has three distinct time bands. Each has its own obligations, its own cost drivers, and its own decision points. The terracotta dots mark items with specific legal consequences if missed. The brass dots mark operationally critical actions that aren't legally mandated but determine the trajectory of the response. Legend Legal obligation, specific consequences if missed Operationally critical, shapes the trajectory First 4 Hours Contain, preserve, and make the structural choice Call outside counsel, before any other vendor This is the sequence decision. Counsel engaged first means the investigation can be structured to protect privilege. Counsel engaged after the IT team has already started the forensic work means that work is not privileged. Do not brief your internal team broadly, do not notify your IT vendor, do not call your insurance company, and do not draft any customer communication before counsel is on the phone. Issue a litigation hold A written instruction to preserve all documents, communications, logs, and system records related to the incident. Issued the moment litigation is reasonably anticipated, which is at discovery, not after notification. Destruction of evidence after a litigation hold should have been issued is spoliation . Courts treat it severely in subsequent proceedings. Contain the incident, without destroying evidence The IT team's instinct is to wipe and rebuild affected systems. In a breach response, that instinct is wrong: those systems contain the forensic evidence that establishes scope, root cause, and attribution. Containment means isolating affected systems from the network without wiping them , preserving logs, and capturing volatile memory where possible. Forensic investigators retained through counsel will direct this process. Notify your cyber liability insurer Most cyber policies have prompt notice requirements , some as short as 24–72 hours. Late notice can void coverage. Locate your policy before a breach happens; know the notice deadline and the notification mechanism. The insurer may have pre-approved vendors for forensics and counsel, and using unapproved vendors can affect coverage. Hours 4 – 72 Investigate scope, assess obligations, manage the circle Engage forensic investigators through counsel The forensic team's engagement letter should run to counsel, not directly to the business. They report to counsel. Their findings are communicated through counsel. This structure is what makes their report potentially privileged as attorney work product. The forensic report is the document that most directly drives liability in breach litigation , it documents exactly what happened, what data was compromised, and what security failures enabled the breach. Assess the scope of affected data, systematically What type of data was accessed or exfiltrated? Names alone don't trigger notification. Names combined with Social Security numbers, financial account numbers with access codes, or health information do , under Texas law. Names with driver's license numbers do. The scope assessment determines which notification obligations apply, to how many individuals, and under which laws. Identify which notification laws apply Texas Chapter 521 governs notification to Texas residents. HIPAA governs if health data is involved. GLBA Safeguards Rule governs if financial institution data is involved. PCI DSS contractual obligations apply if cardholder data is compromised. Multiple obligations may run simultaneously with different deadlines. The notification obligation analysis is a legal determination, not an IT one, it requires counsel. Manage the internal circle, tightly Every person briefed on the breach is a potential witness. Internal communications about the breach that are not directed through counsel are not privileged and are discoverable. Brief only those who need to know , the incident response team and the relevant executives. All substantive communications about the breach should go through counsel. Slack messages, emails, and texts describing what happened, who knew, and when are evidence. Review contracts with affected third parties If the breached data includes customer data, vendor data, or data processed under a service agreement, those contracts likely contain breach notification provisions, some with deadlines as short as 24–72 hours for business-to-business notification. Contractual notification obligations can be shorter than statutory ones. Breach of a contractual notification deadline is itself a breach of contract claim. Day 3 – 60 Notify, remediate, and document the response Send breach notification to affected individuals Texas Chapter 521 requires notification "as expeditiously as possible" and no later than 60 days after determining a breach occurred. The notification letter must include: what happened, what type of data was involved, steps taken to protect individuals, steps individuals can take to protect themselves, and contact information. The letter is reviewed by counsel before it is sent. Unnecessary admissions in a notification letter expand liability exposure. Notify the Texas Attorney General if 250+ residents are affected Texas Business and Commerce Code §521.053 requires notification to the Texas AG when a breach affects 250 or more Texas residents , within the same 60-day window. The AG notification must be made simultaneously with, or before, the individual notifications. This filing is public record. Failure to notify carries civil penalties of up to $100 per affected individual, up to $250,000 per breach for unintentional violations. Remediate, with documentation Every remediation step taken, patching vulnerabilities, resetting credentials, implementing new controls, should be documented in writing, dated accurately, and retained. In subsequent litigation or regulatory review, the question of what the business did after the breach is as important as what the business did before it. Remediation without documentation looks like remediation never happened. Prepare for litigation and regulatory inquiry A breach affecting a meaningful number of individuals typically generates demand letters or class action filings within 30–90 days of notification. Regulatory inquiries from the Texas AG, the FTC, or sector-specific regulators can follow. The litigation hold, the counsel-directed forensic investigation, and the documented remediation are the foundation of the defense. Businesses that treated the response as a communications problem rather than a legal one arrive at this stage without that foundation. Notification obligations by law Multiple notification regimes often apply to the same breach simultaneously, each with its own trigger, deadline, and required recipient. The matrix below shows the most common frameworks affecting Texas businesses. Notification requirements Primary frameworks affecting Texas businesses Law / Framework Trigger Deadline Who must be notified Texas Chapter 521 Unauthorized access to sensitive personal information of TX residents 60 days from determination Affected individuals; TX AG if 250+ residents HIPAA Breach Rule Breach of unsecured protected health information 60 days (individuals + HHS); immediate media notice if 500+ in a state Affected individuals; HHS; media if 500+ in a state GLBA Safeguards Rule Unauthorized access to customer financial information 30 days for FTC notice if 500+ customers FTC; affected customers as soon as reasonably practicable PCI DSS Compromise of cardholder data environment Immediate, typically within 24 hours of discovery Acquiring bank; card brands (Visa, Mastercard, etc.) Contractual obligations Breach affecting data processed under a vendor or service agreement Per contract, often 24–72 hours Counterparty named in the agreement Important: Multiple frameworks frequently apply to the same breach. The shortest applicable deadline controls. Contractual notification obligations in vendor or service agreements are often shorter than statutory ones, review all contracts with affected third parties in the first 72 hours. The mistake that defines the response Most breach response failures trace back to a single decision made in the first hour: the business treats the breach as an IT problem and calls the IT team before calling an attorney. The IT team calls a forensic vendor. The forensic vendor begins its investigation. By the time counsel is engaged, the investigation is underway, and the forensic report is not privileged. The forensic report is the document that tells the story of the breach. It identifies the attack vector, the duration of the intrusion, the data accessed, and the security controls that failed to prevent it. That story is what plaintiff's attorneys use to build a negligence case and what regulators use to assess penalties. A privileged forensic report can be withheld in litigation. An unprivileged one cannot. A breach is a legal event before it is a technology event. The first call determines whether the response is protected or exposed. The practical implication: your incident response plan, which every business handling customer data should have, and which most don't, should identify outside counsel as the first call, above the IT vendor, above the insurer, above the CEO's communications advisor. The sequence is not a technicality. It is the structural decision that determines whether the forensic investigation and the response documents live inside the attorney-client privilege or outside it. Before the breach happens Two investments made before a breach occurs determine whether the response is orderly or chaotic. Neither requires significant resources. The first is a written incident response plan. It should name the response team, who is called first, in what order, and what each person's role is. It should identify outside counsel and the forensic vendor (engaged through counsel) before the incident, not during it. It should document the notification obligations that apply to your business based on the data you hold. And it should include the cyber insurance policy number and the insurer's breach notification contact. A business that discovers a breach at 11pm on a Friday and has to locate all of this information in real time will lose the first four hours to logistics rather than response. The second is cyber liability insurance appropriately sized to the business's data exposure. A breach affecting several thousand customer records, routine in scale, can cost $150,000–$400,000 in notification, forensics, credit monitoring, and regulatory defense before a single civil claim is filed. That is not a cost most small and mid-sized Texas businesses can absorb from operations. Cyber coverage is the mechanism that makes a manageable incident out of one that would otherwise be existential. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help The first call in a breach response should be to counsel. Breach response creates simultaneous obligations running in multiple directions — legal holds, regulatory notifications, contractual obligations to business partners, and communications to affected individuals. The sequence matters, and the first 72 hours define the legal exposure for everything that follows. Effective counsel in this space understands the operational reality of an incident response, not just the regulatory framework. When a breach requires specialized privacy litigation or regulatory defense, Scale LLP's team handles it. The corporate and governance coordination stays in one place. That call can start now. Schedule a Call Going deeper Questions I hear from Texas businesses about data breach obligations. What is Texas law on data breach notification? Texas breach notification requirements are governed by Texas Business and Commerce Code Chapter 521 and, effective January 2024, the Texas Data Privacy and Security Act (TDPSA). Chapter 521 requires notification to affected Texas residents "as expeditiously as possible" and no later than 60 days after determining a breach occurred. Sensitive personal information triggering notification includes names combined with Social Security numbers, driver's license or state ID numbers, financial account numbers with access codes, and certain health information. Texas requires notification to the Texas AG when 250 or more Texas residents are affected, within the same 60-day window. The TDPSA imposes additional obligations on businesses processing personal data above certain thresholds. Why should a breach investigation be conducted through outside counsel? Retaining outside counsel first, and having forensic investigators engaged by and reporting to counsel, protects the investigation under attorney-client privilege and potentially as attorney work product. The forensic report documenting root cause, scope, and security failures is exactly the document that drives liability in breach litigation and regulatory proceedings. If the investigation is conducted without a counsel-directed structure, those documents are not privileged and are discoverable by plaintiff's attorneys and regulators. This structural choice is made in the first hour and cannot be undone after the fact. What federal laws apply to data breaches in Texas businesses? Federal obligations depend on industry and data type. HIPAA requires covered entities to notify individuals within 60 days, HHS promptly, and media for breaches affecting 500+ state residents. The GLBA Safeguards Rule requires financial institutions to notify the FTC within 30 days for breaches affecting 500+ customers. PCI DSS, a contractual standard, not a federal law, requires immediate notification to acquiring banks and card brands. FERPA applies to educational institutions. Multiple frameworks often apply simultaneously with different deadlines; the shortest applicable deadline controls. Does a Texas business need a written incident response plan? No Texas statute expressly requires all businesses to have a written plan, but the absence of one is evidence of inadequate data security practices in any resulting litigation or regulatory proceeding, and the adequacy of security practices is often central to the liability question. Federal frameworks including HIPAA and the GLBA Safeguards Rule impose written plan requirements on specific industries. Practically, a plan that names outside counsel as the first call, identifies the forensic vendor engaged through counsel, documents applicable notification obligations, and lists the cyber insurance contact information converts the chaotic first four hours of a breach into an orderly response. What personal information triggers Texas breach notification? Under Texas Chapter 521, "sensitive personal information" triggering notification includes an individual's name in combination with their unencrypted Social Security number; driver's license or Texas state ID number; financial account number or credit/debit card number with any required access code; and certain health information. The combination requirement matters, a list of names alone does not trigger notification. A list of names with Social Security numbers does. The obligation is triggered when the business determines a breach occurred, or when it reasonably believes one occurred, creating an obligation to investigate with urgency. What happens if a Texas business fails to notify after a data breach? Failure to provide required notification under Texas Chapter 521 exposes the business to civil penalties enforced by the Texas AG, up to $100 per individual not notified, maximum $250,000 per breach for unintentional violations; up to $500,000 for intentional violations. The AG can also seek injunctive relief. Beyond state penalties, failure to notify is evidence of negligence in private lawsuits and can trigger scrutiny from federal regulators if federally regulated data was involved. The exposure from a cover-up or delayed disclosure is typically worse than the notification itself. What should a breach notification letter say? Texas law requires notification letters to include: what happened; the type of personal information involved; steps the business has taken to protect individuals from potential harm; steps individuals can take to protect themselves; and contact information for the business. The letter is a legal document, its content is reviewed by plaintiff's attorneys in any litigation and regulators in any investigation. Common mistakes: vague language creating ambiguity about breach scope; admissions about root cause or security failures beyond what is required; and commitments about remediation steps that exceed what has been implemented. The letter should be reviewed by counsel before it is sent. What is cyber liability insurance and does my Texas business need it? Cyber liability insurance covers breach-related costs including forensic investigation, notification, credit monitoring, regulatory defense, and third-party liability. Standard CGL policies do not cover cyber incidents, coverage must be added separately. Key policy terms: pre-approval requirements for retaining vendors (using unapproved vendors can affect coverage); sublimits for specific cost categories; ransomware payment coverage (some policies explicitly exclude it); and the retroactive date that determines whether prior incidents are covered. For any business storing customer data, handling employee records, or processing payments, cyber coverage is not optional, it is the mechanism that makes a $200,000–$500,000 breach event manageable rather than existential. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Trade Secret Confidentiality Agreement / NDA Indemnification (Corporate) Fiduciary Duty Master Service Agreement For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Business Litigation at Scale LLP Explore Starting a Business in Texas: The Legal Checklist Read If you're in a breach right now: call. Don't email. Every hour of the first day matters. The decisions that protect the response are made before most businesses think to pick up the phone. Schedule a Call (682) 529-7177 This article provides general information about data breach response obligations under Texas and federal law and is not legal advice for your specific situation. Breach notification requirements and applicable law depend on the type of data involved, the industries affected, and the specific circumstances of the incident. If you are experiencing a data security incident, contact an attorney immediately, do not rely solely on this article to determine your obligations. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Insights, Texas Business Law Articles & Podcast URL: https://kraus.law/insights/ Insights Thirty-one articles · Seven practice areas A library of the questions Texas businesses ask. A working library, organised by the questions that recur. Formation through exit. Boardroom through courtroom. Plain language, real law, written in the voice of the attorney handling the matter. Practice areas covered Corporate Formation · Governance · M&A Employment Scale LLP Litigation Scale LLP · Former federal prosecutor Intellectual Property Scale LLP · Creedon PLLC acquisition Real Estate Scale LLP Capital & Securities SAFEs · Notes · Priced rounds One attorney. One relationship. 80+ lawyers deep. The Firm Practice area All Corporate Litigation Employment IP & Technology Real Estate Cross-Border All articles Texas Business Court & Specialized Forums The new Texas Business Court framework, the Eighth Division catchment, and decided cases. 01 Texas Business Court two years in. Five decided cases, the Eighth Division, and what 26 months of operations mean for north-central Texas businesses. 14 min Corporate, Governance & Capital From formation through exit, the structural questions every Texas business eventually asks. 02 The Texas Data Privacy Act, one year in. What twelve months of enforcement told us, and what mid-market companies are still getting wrong. 8 min 03 SB 29: what Texas boards need in their governance documents. The codified business judgment rule, three-percent ownership thresholds for derivative suits, and jury waivers, most of the protections are opt-in. 10 min 04 Texas redomestication: the quiet migration from Delaware. Why companies are moving, and why the framework you use to think about the question is more important than the headline numbers. 11 min 05 Starting a business in Texas. The legal checklist most founders skip. 11 min 06 Raising capital in Texas. SAFEs, convertible notes, priced rounds, and what investors want. 11 min 07 Your business partner wants out. Buy-sell agreements, valuation disputes, and the six ways a partner exit ends. 8 min 08 Selling your business in Texas. Six phases of a Texas business sale, the five decisions that determine net proceeds. 12 min Litigation & Disputes When a matter becomes contested, the strategic questions that determine outcomes. 09 Contract disputes in Texas. When to fight, when to settle, and what happens in between. 10 min 10 Business divorces in Texas. Five trajectories, the post-Ritchie v. Rupe reality, and the structural decisions that determine outcomes. 12 min Employment Hiring, firing, classification, investigation, the recurring employer questions. 11 Non-competes in Texas. What employers need to know right now. 9 min 12 Before firing an employee. The pre-termination checklist that separates defensible terminations from wrongful termination cases. 9 min Intellectual Property & Technology Protecting, licensing, and operating around what your business has built. 13 Data breach response: the first 72 hours. The breach response framework every Texas business should have. 9 min Real Estate The Texas-specific questions that surprise commercial property buyers and tenants. 14 Commercial leases in Texas. What your landlord's attorney already knows. 9 min Cross-Border & Multi-State When operations cross state or national lines, the compliance categories that follow. 15 Cross-border U.S./Canada transactions. Nine dimensions where U.S. and Canadian deal mechanics differ. 11 min No articles match that practice area. Try a different filter or view all. One firm. Every question a Texas business faces. Chuck handles corporate counsel, fractional GC, cross-border transactions, and governance directly. When a client's situation calls for employment, IP, litigation, or real estate expertise, Scale LLP's practice groups step in, and Chuck stays involved. That's what "One attorney. One relationship. Eighty lawyers deep" means in practice. About Scale LLP 31 Articles 7 Practice areas 80+ Scale attorneys Corporate · Governance · M&A 13 articles Litigation · Dispute Resolution 7 articles Employment 5 articles Intellectual Property · Licensing 3 articles Real Estate 2 articles Cross-Border · Multi-State 4 articles Technology · Compliance · Privacy 2 articles Y'all Street Law The podcast on Texas business law Weekly episodes on the legal questions Texas business owners face, in Chuck's voice, without the boilerplate. Every episode is also published as a full article in the Insights library. Browse all 16 episodes Or listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm Read enough to know you have a question? Chuck's practice starts with a 15-minute call. No intake form, no associate handoff, a direct conversation about where you are and what you need. Schedule a Call (682) 529-7177 --- ## Non-Competes in Texas: What Employers Need to Know Right Now URL: https://kraus.law/insights/non-competes-texas/ Employment · Litigation June 9, 2026 10 min read Non-competes in Texas: what employers need to know right now. The FTC rule is enjoined. Texas law governs. Most non-competes fail when tested, not because the law changed, but because they were never drafted correctly in the first place. Here's what the Texas Covenants Not to Compete Act requires, where agreements break down, and what to do about it before the next key departure. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Employment Litigation If you read nothing else The FTC non-compete ban has been enjoined by a federal court in Texas and is not in effect. Texas state law, the CNCA, governs, and it has four specific requirements an agreement must meet to be enforceable. The most common failure point: the non-compete is not truly "ancillary to an otherwise enforceable agreement" because the underlying agreement contains only hollow confidentiality language with no real trade secret content provided. A non-compete built on that foundation fails before it's ever tested in court. The status panel below shows the current legal landscape. The requirements analysis that follows tells you what needs to be in the agreement. Call us: (682) 529-7177 Non-compete law in Texas has been unsettled since the FTC issued its rule in 2024. The good news for Texas employers: a federal court in the Northern District of Texas, sitting in Dallas, enjoined the rule before it took effect, and the Fifth Circuit affirmed. As of this writing, the FTC rule is blocked, the injunction is nationwide, and the current federal posture suggests no near-term reversal. Texas state law governs, as it always has. The harder news: Texas law has always required more than most employers realize, and the agreements sitting in their employment files often don't meet the standard. Where things stand right now Non-Compete Law, Current Status Tracker Updated June 2026 FTC Non-Compete Rule Issued April 2024. Enjoined nationwide by the N.D. Texas before taking effect. Fifth Circuit affirmed. Not in force. No current enforcement path. Enjoined Texas CNCA Texas Business & Commerce Code §15.50–15.52. Fully in effect. Controls all non-compete agreements in Texas. Four-part test; court reformation authorized. Active · Controlling Texas Non-Solicitation Customer and employee non-solicitation agreements enforceable under CNCA with same reasonableness requirements. Generally easier to enforce than full non-competes. Active Sale-of-Business Non-Competes Covenants by sellers of businesses are held to a more permissive standard in Texas, broader scope and duration are acceptable. Treated differently from employment non-competes. Active · Broader Scope Federal Legislative Action No current federal legislation eliminating or broadly restricting non-competes has passed Congress. Multiple bills have been introduced but not advanced. Monitor Bottom line for Texas employers: Draft and enforce non-competes as though the FTC rule does not exist. It doesn't, for now. Plan to the CNCA standard, and have current counsel review your existing agreements against that standard. What the CNCA requires, and where agreements fail The Texas Covenants Not to Compete Act has four requirements. Courts apply all four, and failure on any one of them voids the restriction (or triggers reformation). Here's each requirement, what it means in practice, and the most common way agreements fail it. 1 Ancillary to an otherwise enforceable agreement The non-compete must be part of a larger agreement that is itself enforceable, in the employment context, typically a confidentiality and trade secret protection agreement. The non-compete and the underlying agreement must be mutually dependent : the consideration for the non-compete flows from the same transaction as the underlying agreement, and the restrictions protect the interests the underlying agreement establishes. Where it fails The underlying agreement contains boilerplate confidentiality language, but the employer never provides the employee with meaningful confidential information or trade secret training. Courts have held that an agreement promising access to trade secrets that never materializes doesn't anchor the non-compete. The employer made a promise, didn't keep it, and the non-compete has no enforceable foundation. 2 Supported by adequate consideration Something of value must be exchanged for the non-compete obligation. For new hires, the offer of employment itself is sufficient consideration. For existing employees signing a new or amended agreement mid-employment, additional consideration, a raise, a bonus, a promotion, new access to confidential systems or client relationships, is typically required. Continued employment alone is not adequate consideration in Texas for a new non-compete obligation imposed on an existing employee. Where it fails A business rolls out updated employment agreements with new non-competes for its entire staff. No additional compensation or benefit is provided. Employees are told to sign or face termination. In Texas, the threat of termination does not constitute adequate consideration for a new restrictive covenant , and the non-competes are likely unenforceable against any employee who was already employed at the time of signing. 3 Reasonable in time, geography, and scope of activity The three dimensions of reasonableness are evaluated together, against the employee's actual role and the employer's actual legitimate business interest. Duration: one to two years is generally defensible; three years requires strong justification; five years or more faces significant risk of reformation. Geography: tied to where the employee worked and had relationships, not the employer's aspirational national footprint. Scope: limited to activities the employee performed, not every line of business the employer touches. Where it fails A Texas manufacturing company's employment agreement prohibits a mid-level operations manager from working in "any competitive business in the United States or Canada" for three years. The manager worked exclusively in the Dallas–Fort Worth area, had no national client relationships, and had access to confidential information relevant only to local operations. A court will reform this, likely to 18 months within a defined DFW radius, and the employer has spent money litigating a restriction that the agreement should have contained from the start. 4 No greater restraint than necessary to protect a legitimate interest This requirement forces the employer to identify what they are protecting, customer relationships, confidential information, trade secrets, specialized training, and to calibrate the restriction accordingly. The CNCA does not protect the employer's general interest in preventing competition; it protects specific, identifiable business interests . If the restriction is broader than those interests require, it fails this test regardless of how reasonable it looks in isolation. Where it fails A staffing firm prohibits departing employees from working for any client of the firm, a list that includes hundreds of companies across dozens of industries, for two years. The employee had relationships with five specific clients in a single sector. The restriction is broader than necessary to protect the interests at stake, and a court will narrow it to the specific clients the employee served. The employer's desired protection was achievable with a properly scoped agreement. What they have instead is an expensive reformation. The practical alternative: non-solicitation and confidentiality For most Texas businesses, the honest answer is that a non-solicitation agreement paired with a robust confidentiality obligation does the work they need done, and does it with far less enforcement risk. A non-solicitation agreement prohibits the departing employee from soliciting the employer's customers and from recruiting the employer's other employees. It doesn't prevent the employee from working in their field, from using their general skills, or from going to work for a competitor. It prevents them from using the specific relationships they built at your expense to immediately take your clients or your team. Texas courts enforce non-solicitation agreements more readily than broad non-competes because the restriction is narrower and the legitimate interest is more obviously protected. A salesperson who spent five years building relationships with a defined set of clients on your time and with your resources has no equitable claim to walk out the door and call all of them the next morning. A court will agree. The goal isn't the broadest restriction a court won't strike. The goal is the specific protection you need, written in a way that holds up when you need it. The confidentiality obligation is the foundation of both. For any restrictive covenant , non-compete or non-solicitation, to be enforceable under the CNCA, it must be anchored to real confidential information that the employee received. That means the employer must deliver on the promise: provide the access to trade secrets, client relationships, and proprietary processes that the agreement contemplates, document it, and then protect it with the access controls and exit protocols that Texas trade secret law requires. If you have a non-compete in your current employment agreements The question worth asking right now is not "do I have a non-compete" but "would this hold up if I needed it tomorrow." The agreement that has been sitting in the employment file since 2019, copied from a template, applied to every new hire regardless of role, with confidentiality language that promises access to trade secrets the employer never provided, that agreement is likely to fail the CNCA's four-part test when tested. The audit is straightforward. For each key employee: does the underlying agreement contain real confidentiality and trade secret obligations, not just boilerplate? Was the employee given access to specific confidential information or specialized training that the agreement references? Was the consideration adequate, particularly for employees who signed mid-employment? Are the scope, duration, and geography calibrated to that employee's actual role and relationships? If the answer to any of those is no, the agreement needs to be updated before the next departure, not the day after it. Courts treat the moment of departure as the testing date for the agreement as written. The update that happens on the way out the door doesn't fix an agreement that was already broken. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help Non-compete strategy starts before the departure, not after. Evaluating whether a non-compete is worth enforcing — and structuring agreements that will hold up if tested — requires understanding both the legal requirements and the business reality. The cost of enforcement, the likelihood of injunctive relief, and the practical effectiveness of the restriction all factor into the advice. Texas law requires more specificity than most employers realize, and the agreements already in their files often fall short. When enforcement moves to litigation, Scale LLP's employment litigation team handles it. The business counsel relationship stays coordinated throughout. One call before the problem starts is worth ten after. Schedule a Call Going deeper Questions I hear from Texas employers about non-compete agreements. Is the FTC non-compete ban in effect in Texas? As of this writing, no. The FTC issued a final rule in April 2024 that would have banned most non-competes nationwide. A federal district court in the Northern District of Texas enjoined the rule before it took effect, holding that the FTC exceeded its statutory authority. The Fifth Circuit affirmed. The rule has not been implemented and shows no realistic path to enforcement given the current federal posture. Texas employers should plan as though the FTC rule does not exist. Texas state law, the Texas Covenants Not to Compete Act, governs non-compete agreements in Texas and will remain the controlling standard for the foreseeable future. What does the Texas Covenants Not to Compete Act require? The CNCA (Texas Business and Commerce Code §15.50–15.52) establishes four requirements. First, the non-compete must be ancillary to an otherwise enforceable agreement, in the employment context, typically a confidentiality and trade secret protection agreement with real substance. Second, the agreement must be supported by adequate consideration. Third, the restrictions must be reasonable in time, geographic area, and scope of activity. Fourth, the restrictions must be no greater than necessary to protect the employer's legitimate business interest. Courts are authorized to reform, narrow, an overbroad agreement rather than void it entirely, which is a double-edged provision. What counts as "reasonable" duration, geography, and scope in Texas? Texas courts evaluate reasonableness case by case. For duration: one to two years is generally defensible; three years sometimes upheld for senior executives; five years or more faces reformation risk. For geography: the restriction must be tied to where the employee worked and had relationships, not the employer's national footprint if the employee only operated locally. For activity scope: limited to what the employee did, not every business line the employer touches. The most common error is drafting as broadly as possible and relying on reformation. Courts do reform, but the litigation is expensive, the outcome uncertain, and overly broad agreements can signal bad faith. Can I enforce a non-compete against an employee I terminated? Potentially, but the circumstances matter. If the employer terminates without cause in a way that deprives the employee of the consideration promised under the agreement, some Texas courts have found the non-compete unenforceable on those facts. The argument: the employer cannot eliminate the promised benefit and still enforce the corresponding restriction. Whether this applies depends on how the agreement was structured, what consideration was promised, and the specifics of termination. This is one reason how a non-compete is drafted at hiring affects whether it can be enforced years later in circumstances you couldn't predict. What is the difference between a non-compete, a non-solicitation, and a confidentiality agreement? Three different restrictive covenants with different purposes and enforceability profiles. A non-compete restricts where and for whom the employee can work, it limits competitive employment or self-employment. A non-solicitation restricts the employee from soliciting the employer's customers or other employees, it doesn't prevent competitive work, only active poaching. A confidentiality agreement restricts disclosure or use of the employer's confidential information and trade secrets, it doesn't limit where they work. Non-solicitation and confidentiality agreements are generally more enforceable in Texas than broad non-competes because they are narrower. For most businesses, these two instruments accomplish the practical protection goals without the enforceability risk of a full non-compete. What should be in a Texas non-compete agreement to make it enforceable? A defensible Texas non-compete needs: a meaningful confidentiality and trade secret protection obligation in the underlying employment agreement, not boilerplate; real consideration (the offer of employment for new hires; something additional for existing employees signing mid-employment); restrictions calibrated to the employee's actual role, actual geography, and actual client relationships; and, critically, the employer must provide the confidential information and specialized access the agreement promises. An agreement where the employer promises trade secret access but never delivers it has no anchor. The agreement should be reviewed and updated periodically, especially after an employee's role changes significantly. Can I get an injunction to stop a former employee from violating a non-compete? Yes, injunctive relief is the primary remedy, and Texas courts have authority to grant TROs and temporary injunctions in appropriate cases. To get a TRO, you must show a probable right to recovery on the merits, probable imminent and irreparable harm if the injunction is denied, and that the harm to you outweighs the harm to the employee. Proving irreparable harm is the key, courts don't assume it; you must show monetary damages would be inadequate. The TRO process can move in 48–72 hours when properly supported. Act quickly: delay in seeking injunctive relief signals the harm isn't truly irreparable, which is exactly the wrong message to send a court. What happens if a non-compete is overbroad in Texas? Unlike some states where an overbroad non-compete is simply void, the Texas CNCA authorizes courts to reform, narrow, a non-compete that is unreasonable, reducing scope, duration, or geography rather than striking it entirely. For employers, this means a somewhat overbroad agreement may still be partially enforced. For employees, it means even a dramatically overbroad restriction may result in some enforcement. However, courts have shown increasing willingness to refuse reformation when an agreement is so overbroad it suggests bad faith. The better approach: draft defensibly reasonable from the start rather than maximally broad and hoping for favorable reformation. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Noncompete Agreement Nonsolicitation Agreement Trade Secret Confidentiality Agreement / NDA Employment Agreement Injunctive Relief Severance Agreement For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Employment Law at Scale LLP Explore Before Firing an Employee in Texas Read The agreement that matters is the one you have today, not the one you'll draft tomorrow. If key employees don't have agreements you're confident would hold up, that's the conversation worth having before the next departure. Schedule a Call (682) 529-7177 This article provides general information about non-compete law in Texas as of June 2026 and is not legal advice for your specific situation. The legal landscape regarding non-compete agreements, including federal regulatory posture, is subject to change. The status of the FTC rule and related litigation is current as of the publication date; verify current status with counsel before relying on this information. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Raising Capital in Texas: SAFEs, Notes, and What Investors Want URL: https://kraus.law/insights/raising-capital-texas/ Corporate · Securities July 7, 2026 11 min read Raising capital in Texas: SAFEs, notes, and what investors want. Three instruments dominate early-stage capital raises. Each one defers a different problem to a different moment, and creates a different set of founder trade-offs when that moment arrives. Here is how each one works, what it costs, and where the economics are made and lost in the term sheet. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Corporate Fractional GC If you read nothing else SAFEs and convertible notes both defer the valuation question, they're fast, cheap to execute, and don't require setting a price for the company today. That deferral isn't free. The three terms that move the most money: the valuation cap on early SAFEs (which sets the ceiling for how cheaply early investors convert in the priced round); the liquidation preference on preferred stock (which determines what investors take before founders see a dollar in a sale); and whether preferred is participating or non-participating (which determines whether investors take their preference and also participate in the upside). None of these are standard. All of them are negotiated. The term sheet decoder below translates the language investors use into what it means for your cap table. Call us: (682) 529-7177 Capital raising sits at the intersection of corporate law, securities law, and negotiating strategy. Most founders who haven't done it before approach it as a commercial negotiation, price, amount, timeline. Experienced investors have done dozens of these. The terms they use casually in a term sheet carry specific legal and economic meanings that aren't obvious from the language. The goal of this article is to close that gap. Texas has no state securities registration requirements for most private placements that qualify under federal exemptions, primarily Regulation D Rule 506(b) and 506(c), which allow raises from accredited investors without registering the securities. That federal framework is what most early-stage Texas companies use for seed and Series A rounds, and understanding its requirements is the legal foundation for everything that follows. The three instruments, what each one costs Instrument 01 SAFE, Simple Agreement for Future Equity Not debt. No maturity date. No interest. Converts at a future priced round. Pre-Seed · Seed Legal cost: $1K – $5K How it works Investor provides capital today. No shares are issued. At a qualifying priced round, the SAFE converts to equity, typically at a discount to the round price, at the valuation cap, or at the lower of the two. Y Combinator's Post-Money SAFE is the current market standard: the cap is applied to post-money valuation, making dilution more predictable for both parties. Founder trade-offs No valuation negotiation now, beneficial when the company is early. Fast and cheap to execute. Multiple SAFEs with different caps create a complex conversion structure that surprises founders at the priced round. Pro-rata rights accumulate across SAFE investors and can constrain the lead investor's allocation in the Series A. Investor view Simple and founder-friendly instrument. Investors accept it for the discount and the cap, which protect their economics if the company's valuation increases significantly. No creditor rights if the company fails before a priced round: SAFE investors receive proceeds only in a sale or dissolution, after debt is paid. Watch for The MFN (Most Favored Nation) clause: some early SAFE investors negotiate a right to receive the terms of any later, more favorable SAFE issued before the priced round. An MFN clause means your first SAFE investor automatically gets the cap from your best seed deal, which can significantly affect the conversion math at the Series A. Instrument 02 Convertible Note Debt instrument. Carries interest. Has a maturity date. Converts to equity or must be repaid. Seed · Bridge Legal cost: $3K – $10K How it works Investor makes a loan at a stated interest rate (typically 5–8% annually). The note has a maturity date, typically 18–24 months, at which point, if a priced round has not occurred, the investor can demand repayment in cash or, depending on the note terms, convert to equity at a negotiated price. Conversion in a priced round typically includes principal plus accrued interest. Founder trade-offs The maturity date creates a hard deadline for the priced round , or for renegotiating the note. Notes not extended or converted become a balance sheet liability. Many angel investors prefer notes because the debt structure gives them creditor priority over equity holders in a failure scenario. The accrued interest converts, adding to the dilution calculation. Investor view Preferred by investors who want creditor protections if the company doesn't make it to a priced round. The interest accrual and maturity date create leverage: a company approaching maturity with no priced round has reduced bargaining power when asking for an extension. Some investors use notes specifically for this leverage effect. Watch for Automatic conversion provisions: most notes convert automatically in a "qualified financing" above a threshold amount. Below that threshold, conversion is at the investor's option, giving them leverage to demand better terms or repayment. Negotiate the threshold carefully: a qualified financing set too high means the note converts manually, and at the investor's discretion, in smaller rounds. Instrument 03 Priced Round, Preferred Stock Equity issued at a set valuation. No deferral. Investors become shareholders immediately. Series A · B · Later Legal cost: $50K – $150K How it works The company sets a pre-money valuation and issues new preferred shares at a price per share derived from that valuation. Investors receive preferred stock with specific rights and protections. All outstanding SAFEs and convertible notes convert simultaneously as part of the priced round, often creating a complex cap table reconciliation before the round's economics are finalized. Founder trade-offs The valuation is set and negotiated, there is no deferral. Board composition changes: institutional investors typically require a board seat, giving them formal governance rights. Protective provisions (investor veto rights over major decisions) are negotiated. Full legal documentation, stock purchase agreement, IRA, ROFR/co-sale, voting agreement, is required, with significant legal cost on both sides. Investor view Institutional investors, VC funds, require priced rounds because their fund documents require it. Preferred stock gives investors specific economic protections (liquidation preference, anti-dilution) and governance rights (board representation, protective provisions, information rights) that SAFEs and notes don't provide. The priced round is where the negotiation becomes serious. Watch for The pre-money vs. post-money valuation distinction: a $10M pre-money valuation with a $2M raise produces a $12M post-money valuation, and investors own 16.7% of the company. Confusion between pre-money and post-money, which happens more often than it should, produces a cap table that doesn't match either party's expectations. Model the post-money cap table, including SAFE and note conversions, before signing the term sheet. What investors want from a Texas business The instrument is how the capital is delivered. What investors are evaluating is different: a credible path to a return, appropriate for their fund economics and timeline. Angel investors and family offices in Texas are typically writing $25,000–$250,000 checks into businesses they believe in, often in sectors they understand. They want reasonable terms, clear communication, and a business they can follow without needing a law degree. They are generally more flexible on instrument, more patient on timeline, and more willing to invest in a Texas LLC (rather than a Delaware C-corp) than institutional investors. Institutional seed funds and VC firms have fund economics that require specific return profiles, they need a small percentage of their investments to return 10x or more to generate acceptable fund returns. This shapes every aspect of how they invest: they invest in large addressable markets because small markets can't produce the exits they need; they prefer Delaware C-corps because the legal infrastructure is established and exit paths are cleaner; and the terms they negotiate, liquidation preference, anti-dilution, pro-rata, are designed to protect their economics in the scenarios where the outcome is good but not a home run. A term sheet that looks founder-friendly on valuation can be investor-friendly on everything else. The economics live in the details. The most common mismatch in Texas capital raises: a founder who wants to raise from institutional investors but has structured their business, Texas LLC, no IP formally assigned, complex cap table from informal agreements, in a way that makes institutional investment difficult or expensive to accommodate. Institutional investors are not going to convert a Texas LLC to a Delaware C-corp, clean up unregistered securities, and reconcile informal equity arrangements, they will pass and invest elsewhere. The time to structure for institutional capital is before the first meeting, not during diligence. The term sheet decoded The term sheet is where the real negotiation happens. Every provision has a plain-English meaning behind the legal language. These are the six provisions that move the most money. Term sheet decoder Six provisions and what they mean for founders Pre-Money Valuation "The Company shall issue Series A Preferred Stock at a pre-money valuation of $8,000,000." What it means This is the agreed value of the company before the investment. The post-money valuation is pre-money + the investment amount. At an $8M pre-money with a $2M raise, investors own 20% post-closing. But this number is calculated before SAFE and convertible note conversions, which dilute everyone, including the new investors. Model the fully diluted cap table before agreeing to the pre-money number. 1x Non-Participating Liquidation Preference "In the event of a liquidation, dissolution or winding up, Series A holders shall receive 1x their investment before any distribution to Common." What it means Investors get their money back first in a sale. Non-participating means they choose either (a) take the 1x preference, or (b) convert to common and share pro-rata. In a large exit, they convert. In a smaller exit, they take the preference. This is the market standard, insist on non-participating . Participating preferred (where investors take the preference and also participate in the upside) can leave founders with very little in a moderate outcome. Broad-Based Weighted Average Anti-Dilution "The Series A conversion price shall be subject to broad-based weighted average anti-dilution adjustment." What it means If you raise future money at a lower valuation (a down round), investors' shares adjust to give them more equity. Broad-based weighted average is the founder-friendly standard , it moderates the adjustment based on the full diluted share count. Full ratchet anti-dilution is the aggressive version, it resets the conversion price to the lowest price paid in any down round, however small. Never agree to full ratchet. Protective Provisions "For so long as any shares of Series A Preferred Stock are outstanding, the Company shall not, without the approval of holders of a majority of Series A..." What it means Investors get veto rights over specified major decisions: issuing new stock, amending the charter, paying dividends, incurring significant debt, selling the company. Standard protective provisions are reasonable. Expanded protective provisions , covering operational decisions like compensation, capex, or partnership agreements, significantly constrain day-to-day management. Negotiate the list carefully and understand what requires investor approval before you sign. Pro-Rata Rights "Each investor shall have the right to participate in future financing rounds in an amount up to their pro-rata share of such financing." What it means Investors can invest in your next round to maintain their percentage ownership. Standard and reasonable. Super pro-rata rights , the right to invest more than their pro-rata share, are occasionally requested by aggressive early investors and can crowd out the new lead investor. Resist super pro-rata. Also consider aggregate pro-rata commitments across all SAFE investors, which can consume a large portion of a future round's available allocation. Board Composition "The Board shall consist of five directors: two elected by holders of Common Stock, two elected by holders of Series A Preferred, and one independent director mutually agreed upon." What it means Investors get formal governance control commensurate with a 2-of-5 board. The independent director selection process matters : if investors have effective veto over who the independent is, they functionally control three of five votes. Negotiate for founder approval rights on the independent director and for the process by which the independent seat is filled. The board composition at Series A typically persists through Series B and beyond. Securities law compliance, what you must not skip Every capital raise is an offering of securities under federal law. Every SAFE, convertible note, and preferred stock issuance is a securities transaction. Failing to comply with the applicable exemptions, primarily Regulation D Rule 506(b) and 506(c), results in unregistered securities that can be rescinded by investors, creates significant regulatory exposure, and makes future institutional investment significantly more complicated. The requirements for a 506(b) offering: the company must file a Form D with the SEC within 15 days of the first sale; all investors must be accredited (or up to 35 sophisticated non-accredited investors, though these are uncommon in practice); and the offering cannot be generally advertised or solicited. A 506(c) offering allows general solicitation but requires the company to take reasonable steps to verify that all investors are accredited, more than simply taking their word for it. Texas also requires a notice filing with the Texas State Securities Board within 15 days of the first sale in Texas for most Regulation D offerings. Failure to make this filing is a technical violation, though not as consequential as the federal failure. Both filings are administrative and inexpensive. Neither requires more than a day to complete. Skipping them because the round was small or informal is the kind of shortcut that becomes expensive in due diligence for the next round. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help Capital raising requires counsel who understands both sides of the term sheet. Every provision in a term sheet has a cost, and understanding that cost — from a liquidation preference's impact on common holders to an anti-dilution clause's effect on future rounds — is what separates effective counsel from document review. The work spans deal structure, securities compliance, investor negotiation, and cap-table management. When a raise involves Scale LLP's securities regulatory expertise, that coordination happens within one relationship. You get a single point of contact with visibility across the entire transaction. One call starts the process. Schedule a Call Going deeper Questions I hear from Texas founders thinking about raising capital. What is a SAFE and how does it work in Texas? A SAFE (Simple Agreement for Future Equity) is an instrument by which an investor provides capital today in exchange for the right to receive equity in a future priced round. It is not a loan, no interest rate, no maturity date, no obligation to repay in cash. The investor's dollars convert to equity when the company completes a qualifying priced round, typically at a discount to the round price and/or subject to a valuation cap. Y Combinator's Post-Money SAFE is the current market standard. SAFEs have become dominant in early-stage raises because they're fast, cheap, and defer the valuation negotiation. The trade-off: multiple SAFEs with different caps create a complex, sometimes surprising dilution structure when the priced round closes. What is the difference between a SAFE and a convertible note? Both allow a company to raise capital today and convert to equity later, but they're structurally different. A convertible note is debt, it carries an interest rate (typically 5–8%), has a maturity date (18–24 months), and if it hasn't converted before maturity, the investor can demand repayment of principal plus interest. A SAFE is not debt, no interest, no maturity, no obligation to repay. Investors who want creditor protections prefer notes. Institutional seed funds generally prefer SAFEs. The choice is driven by investor preference and how both instruments will interact with the eventual priced round. What is a priced round and when does it make sense? A priced round is an equity financing in which the company sets a valuation, issues new shares at a specific price, and investors receive equity directly. It requires significantly more legal documentation than SAFEs or notes, stock purchase agreement, IRA, ROFR/co-sale, voting agreement, with total legal costs typically $50,000–$150,000. A priced round makes sense when you're raising a larger amount that justifies the cost and complexity, when investors are institutional (VC funds require priced rounds at Series A and beyond), and when the valuation can be defended with financial data. It resolves the valuation question that SAFEs and notes defer, with a more intense negotiation, but a clear cap table afterward. What does 'liquidation preference' mean in a VC term sheet? A liquidation preference lets preferred stockholders receive a specified return before common stockholders in a sale or liquidation. A 1x non-participating preference, the market standard, means investors get back their capital first, but then choose either (a) take the preference, or (b) convert and participate pro-rata. Non-participating is founder-friendly and is the right term to insist on. Participating preferred, where investors take the preference and then also participate in remaining proceeds, can dramatically reduce founder proceeds in moderate outcomes. Model the economics under your liquidation preference structure at different exit valuations before signing. What are anti-dilution provisions and why do they matter? Anti-dilution provisions protect preferred stockholders if the company raises capital in a future round at a lower valuation than the round in which they invested. There are two types. Broad-based weighted average anti-dilution is the market standard and is relatively founder-friendly, it adjusts the conversion price based on the weighted average of all shares issued in the down round. Full ratchet is the aggressive version, it resets the conversion price to the lowest price paid in the down round, regardless of how small that round was. Full ratchet can be catastrophic for founders in a down round: even a small investment at a lower price gives early investors so many additional shares on conversion that founders may be left with negligible ownership. Never agree to full ratchet. What is a pro-rata right and should I give it to investors? A pro-rata right allows an existing investor to participate in future rounds in proportion to their current ownership, to maintain their percentage rather than being diluted. Standard pro-rata rights are reasonable, investors value them, and they signal confidence in the company. Super pro-rata rights, the right to invest more than their pro-rata share, are occasionally demanded and should generally be resisted, as they can crowd out the new lead investor. Practically, aggregate pro-rata commitments across multiple SAFE investors can become unwieldy and need to be managed carefully before a priced round closes. What is a term sheet and is it binding? A term sheet sets out the proposed terms of an investment before full legal documentation. It covers the key economic and governance terms: pre-money valuation, investment amount, type of security, liquidation preference, anti-dilution, board composition, protective provisions, and information rights. Most economic and structural terms are non-binding until definitive agreements are signed. However, exclusivity (preventing the company from soliciting other financing for 30–60 days) and confidentiality are typically binding. Treat the term sheet as a serious commitment even though it's not legally binding on deal terms, backing out after the investor has incurred significant diligence costs damages your reputation in a community that is smaller than it looks. What are investor protective provisions and how much control do they give investors? Protective provisions require preferred stockholder consent before the company can take specified significant actions, issuing new stock, amending the charter, selling the company, incurring significant debt. Standard protective provisions are reasonable investor protections. Expanded protective provisions covering operational decisions like compensation, capex, or acquisitions significantly constrain day-to-day management and create ongoing friction. The scope is negotiable, evaluate each proposed provision carefully. Understand exactly which actions require investor approval before signing, and model how those approvals will work operationally as the business grows. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Shareholder Member Membership Interest Capital Contribution Distribution Certificate of Formation Company Agreement Representations and Warranties Class Voting / Series Voting Cumulative Voting Promissory Note For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Fractional General Counsel Explore Starting a Business in Texas: The Legal Checklist Read Selling Your Business in Texas: The Owner's Roadmap Read The most valuable call is the one before the term sheet arrives. Fifteen minutes on structure and strategy before the first investor meeting is worth more than any amount of negotiation after the term sheet is on the table. Schedule a Call (682) 529-7177 This article provides general information about capital raise structures and securities law compliance and is not legal advice for your specific situation. Securities offerings are governed by both federal and state law, and the requirements depend on the specific structure, the investors, and the amount raised. Consult a securities attorney before completing any capital raise. Nothing in this article constitutes an offer or solicitation of securities. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## SB 29: What Texas Boards Need in Their Governance Documents URL: https://kraus.law/insights/sb-29-governance-documents/ Corporate Governance · SB 29 · TBOC May 11, 2026 10 min read SB 29: what Texas boards need in their governance documents. The codified business judgment rule, three-percent ownership thresholds for derivative suits, and jury waivers are now available to Texas entities. Most of the protections are opt-in. Here's what to amend, in what order. By Charles R. Kraus Partner, Scale LLP Practice areas this article covers Corporate Governance Texas Business Law If you read nothing else Senate Bill 29 became law on May 14, 2025, effective immediately. It codified the business judgment rule, authorized publicly traded corporations and qualifying private entities to require minimum ownership thresholds for shareholder derivative actions, permitted prospective jury trial waivers for internal entity claims, narrowed shareholder books-and-records inspection rights, and gave LLCs and limited partnerships substantially more flexibility to define, or eliminate, fiduciary duties. The first federal court decision applying SB 29, Gusinsky v. Reynolds , decided March 17, 2026, dismissed a derivative action against Southwest Airlines on the basis of a three-percent threshold bylaw the company adopted just sixteen days after SB 29 took effect. The threshold worked. The case was dismissed with prejudice. The practical question for Texas-domiciled corporations is no longer whether SB 29 matters. It is which provisions apply automatically, which require an affirmative election, and which require both an election and a specific bylaw amendment. A board that does nothing leaves most of the new protections on the table. Call us: (682) 529-7177 → Senate Bill 29 became law on May 14, 2025, the day Governor Abbott signed it. The effective date was immediate. In one document, the Texas legislature codified the business judgment rule, authorized publicly traded corporations and qualifying private entities to require minimum ownership thresholds for shareholder derivative actions, permitted prospective jury trial waivers for internal entity claims, narrowed the scope of shareholder books-and-records inspections, and gave LLCs and limited partnerships substantially more flexibility to define, or eliminate, fiduciary duties . For Texas-domiciled corporations, the practical question is no longer whether SB 29 is significant. The first federal court decision applying it, Gusinsky v. Reynolds , decided in the Northern District of Texas on March 17, 2026, dismissed a derivative action against Southwest Airlines on the basis of a three-percent ownership-threshold bylaw the company had adopted just sixteen days after SB 29 took effect. The threshold worked. The case was dismissed with prejudice. The question now is which of SB 29's provisions apply automatically, which require an affirmative election in the governing documents, and which require both an election and a specific bylaw amendment. The answer matters. A board that does nothing leaves most of the new protections on the table. The codified business judgment rule SB 29 adds Section 21.419(c) to the Texas Business Organizations Code . The provision presumes that directors and officers of a covered corporation act: in good faith on an informed basis in furtherance of the corporation's interests in obedience to the law and the corporation's governing documents A claimant seeking to challenge a director or officer decision must do three things: rebut one or more of the presumptions, prove that the act or omission breached a fiduciary duty, and prove that the breach involved fraud, intentional misconduct, an ultra vires act , or a knowing violation of law. This is a meaningfully stronger formulation than the common-law business judgment rule it succeeds. The burden of proof shift is the change that matters. Under the common-law version, the presumption that directors acted appropriately could be rebutted on a relatively modest showing. Under the codified version, even a successful rebuttal does not get the plaintiff to liability, the plaintiff still has to prove the breach and prove that the breach involved one of four named categories of misconduct. Who it applies to Publicly traded corporations, specifically, those with a class or series of voting shares listed on a national securities exchange, are governed by the codified rule by default. Private corporations are not. They must affirmatively elect the rule by including a statement to that effect in their governing documents. The drafting decision For a private Texas corporation considering whether to elect the codified rule, the board should weigh two things. First, the codified rule is more protective of directors and officers than the common law. Second, the election triggers eligibility for the three-percent derivative threshold provision discussed below, but only if the corporation has 500 or more shareholders. Most private corporations will benefit from electing the rule even if they cannot also adopt the three-percent threshold. The election language can be simple. A representative formulation: "The corporation elects to be governed by Section 21.419(c) of the Texas Business Organizations Code." The election should appear in the certificate of formation , or, if the certificate cannot easily be amended, in the bylaws. The choice has implications for amendment procedure, since certificate amendments typically require shareholder approval while bylaw amendments often do not. The three-percent derivative threshold The most consequential procedural change in SB 29 is the new Section 21.552(a)(3), which authorizes certain corporations to require a minimum ownership threshold for shareholders to bring derivative proceedings. The threshold cannot exceed three percent of the corporation's outstanding shares. Who can adopt the threshold Two categories of corporations qualify. First: publicly traded corporations with national-exchange listings. Second: private corporations with 500 or more shareholders that have elected to be governed by the codified business judgment rule. A privately held corporation with fewer than 500 shareholders cannot adopt the three-percent threshold even with a business judgment rule election. This is a significant carve-out. The threshold is designed for entities that face a real risk of strike suits by minimal-position activist plaintiffs, not for closely held corporations. Drafting the bylaw The Southwest bylaw upheld in Gusinsky set the threshold at the statutory maximum of three percent. Some advisors are recommending the maximum, on the theory that future statutory amendments may raise the ceiling and a board would want to capture the increase automatically. Others are recommending a more conservative figure such as one percent, on the theory that a three-percent threshold may face additional constitutional challenge in state court even after Gusinsky , and a lower threshold is less likely to invite litigation. Both positions are defensible. Most public-company boards are landing on the maximum. The court in Gusinsky validated the timing of Southwest's amendment. The bylaw was adopted after the plaintiff's demand letter but before the lawsuit was filed, and the court found that what mattered was the timing of the lawsuit, not the demand. A corporation can amend its bylaws to adopt the threshold in response to a demand letter, provided the amendment is adopted before any derivative suit is filed. That timing latitude will not last forever. Boards should not rely on the latitude as a substitute for preemptive bylaw amendment. Gusinsky was a federal court decision applying Texas law. Texas state courts have not yet weighed in on the constitutional challenges the Gusinsky plaintiff raised, the open-courts and retroactivity arguments, though the federal court's reasoning is persuasive and the legislature's intent on this point is well-documented. The jury waiver, Section 2.115 SB 29 also adds Section 2.115 to the TBOC, allowing Texas entities to prospectively waive jury trials for "internal entity claims," which the statute defines broadly to include derivative claims and allegations of breaches of fiduciary duty. Internal corporate disputes, particularly cases involving complex transactional fact patterns or technical fiduciary questions, are often better suited to bench trials before specialized judges. The Texas Business Courts are the natural forum for these disputes. Pairing a Section 2.115 jury waiver with a forum selection clause designating the Texas Business Courts as the exclusive forum creates a procedurally aligned framework: specialized judge, no jury, written opinions feeding into the developing Texas business law jurisprudence. Like the business judgment rule election, the jury waiver is opt-in for non-public corporations. The waiver should appear in the certificate of formation or bylaws, and is enforceable even against shareholders who did not individually sign it, a meaningful departure from how jury waivers are typically analyzed under standard contract principles. A representative formulation: "The corporation elects to apply Section 2.115 of the Texas Business Organizations Code. All internal entity claims, including without limitation derivative claims and claims for breach of fiduciary duty, shall be tried to the court without a jury." Books and records, what shareholders can no longer demand SB 29 narrows the scope of shareholder books-and-records demands in two ways. First, emails, text messages, social media content, and similar electronic communications are excluded from the definition of corporate records, unless the specific communication directly effectuated a corporate action. Second, corporations subject to the codified business judgment rule may deny inspection demands made in connection with an active or pending derivative proceeding, or with active or pending civil litigation to which the corporation and the requesting shareholder are or are expected to be adversarial parties. The second limitation does not impair a shareholder's discovery rights in actual litigation, formal discovery still applies. What it does is foreclose the use of the books-and-records inspection demand as a pre-litigation discovery tool. Boards engaged in sensitive deliberations no longer have to assume that every text message between independent directors will be discoverable through an inspection demand. Communications that do not constitute formal corporate action are now meaningfully outside the demand's scope. The implication is not that director communications can be careless, but that the practical envelope for board-level deliberation is somewhat wider than it was a year ago. LLCs and limited partnerships, duty elimination SB 29 extends additional flexibility to Texas LLCs and limited partnerships. The governing documents of these entities may now eliminate, not merely restrict, fiduciary duties owed to the entity by members, managers, and officers. This is a more aggressive change than the parallel provisions for corporations, and it should be approached with care. Eliminating fiduciary duties entirely is rarely the right answer for a Texas LLC , particularly one with outside investors or minority members. The more useful drafting move in most cases is to define the duties with specificity, what the duty of loyalty covers in this entity, what disclosure obligations attach, what the consequences of breach are, rather than to eliminate them outright. The new flexibility is most useful in the context of fund vehicles, joint ventures, and other structures where the parties are sophisticated, the economic terms are heavily negotiated, and the parties prefer to specify the rules themselves rather than rely on default fiduciary doctrines. What boards should do before year-end For a Texas-domiciled corporation that has not yet acted on SB 29, the practical sequence is short. Step 1: Determine whether SB 29 applies automatically. If the corporation is publicly traded with national-exchange listing, the codified business judgment rule applies by default. The board should still review and update its governing documents to take advantage of the optional provisions. Step 2: For private corporations, evaluate the election. A private Texas corporation should consider whether to affirmatively elect the codified business judgment rule. For most companies with outside investors or any prospect of litigation exposure, the election is straightforward. Step 3: Determine eligibility for the three-percent threshold. If the corporation has 500 or more shareholders and has elected the codified rule, the threshold is available. Adopt it. If the corporation does not meet the 500-shareholder threshold, the protection is unavailable, but the business judgment rule election still has value on its own. Step 4: Pair the jury waiver with a forum selection clause. If the corporation is amending its certificate of formation or bylaws anyway, add Section 2.115 jury waiver language and a forum selection clause designating the Texas Business Courts as the exclusive forum for internal entity claims. Step 5: Update inspection-rights provisions. Specify in the bylaws, or via board resolution, the corporation's position on the new books-and-records limitations. None of this is complicated drafting. What it requires is board attention before the next derivative demand arrives. Once a demand is on the table, the timing window for amending bylaws narrows quickly. The Gusinsky timing rule is forgiving, but boards should not rely on it indefinitely. Engagement Texas-licensed corporate counsel for boards updating governance documents. SB 29 is among the most consequential changes to Texas corporate law in a generation. The provisions are individually electable, a thoughtful board can adopt the protections that fit its profile and decline the ones that would invite friction. The drafting decisions are not technically difficult, but they are situational, and the best answers depend on the specific shareholder base, capital structure, and litigation profile. My practice covers the governance-document work directly, certificate of formation amendments, bylaw updates, board-resolution sequencing, shareholder approval planning where needed. The Texas Business Court forum-selection layer and the jury-waiver mechanics are part of the same conversation. The first conversation is fifteen minutes. It identifies which SB 29 provisions fit the situation and what the amendment sequence should look like. Schedule a Call Going deeper on this topic? Brian Elliott and I covered SB 29 in detail on the Y'all Street Law Podcast, Episode 11: Texas Corporate Law Overhaul . Going deeper. Questions I hear from Texas business owners and counsel on this topic. When did Texas SB 29 take effect? Senate Bill 29 was signed into law by Governor Greg Abbott on May 14, 2025, and took effect immediately. The companion legislation, SB 1057, was signed May 19, 2025 and took effect September 1, 2025. Does SB 29 apply to my Texas corporation automatically? It depends on whether your corporation is publicly traded. The codified business judgment rule under TBOC Section 21.419(c) applies automatically to corporations with voting shares listed on a national securities exchange. Private Texas corporations must affirmatively elect the rule by including a statement to that effect in their certificate of formation or bylaws. The same opt-in mechanic applies to the three-percent derivative threshold (Section 21.552(a)(3)) and the jury waiver (Section 2.115) for non-public corporations. What did the Gusinsky v. Reynolds decision establish? Gusinsky v. Reynolds, decided March 17, 2026 in the U.S. District Court for the Northern District of Texas, was the first federal court decision applying SB 29. The court dismissed a shareholder derivative action against Southwest Airlines because the plaintiff held only 100 shares, far below the three-percent ownership threshold Southwest had adopted in its bylaws sixteen days after SB 29 took effect. The decision validated three points: that SB 29's authorization of ownership thresholds is constitutional, that what matters for the threshold's applicability is the timing of the lawsuit (not the demand letter), and that bylaw amendments adopted after a demand but before suit are enforceable. What is the three-percent derivative threshold? TBOC Section 21.552(a)(3) authorizes publicly traded Texas corporations, and private Texas corporations with 500 or more shareholders that have elected the codified business judgment rule, to require shareholders to hold at least a specified percentage of outstanding shares before bringing a derivative action. The threshold cannot exceed three percent. The provision is designed to limit strike suits by minimal-position activist plaintiffs by requiring real economic stake before the corporation can be put through derivative litigation. What is the jury waiver provision under SB 29? TBOC Section 2.115 allows Texas entities to prospectively waive jury trials for internal entity claims, which the statute defines to include derivative claims and allegations of breaches of fiduciary duty. The waiver is enforceable against shareholders even if they did not individually sign it, a meaningful departure from how jury waivers are typically analyzed under contract principles. The waiver pairs naturally with a forum selection clause designating the Texas Business Courts as the exclusive forum for internal entity disputes. How did SB 29 change shareholder books-and-records rights? SB 29 narrowed shareholder inspection rights in two ways. First, emails, text messages, social media content, and similar electronic communications are excluded from the definition of corporate records unless the specific communication directly effectuated a corporate action. Second, corporations subject to the codified business judgment rule may deny inspection demands made in connection with an active or pending derivative proceeding, or with civil litigation in which the corporation and the requesting shareholder are or are expected to be adversarial parties. Formal discovery rights in actual litigation are not impaired. Should our LLC eliminate fiduciary duties under SB 29? SB 29 permits Texas LLCs and limited partnerships to eliminate, not merely restrict, fiduciary duties owed to the entity by members, managers, and officers. The flexibility is real, but eliminating duties entirely is rarely the right answer for an operating LLC with outside investors or minority members. The more useful drafting move is to define the duties with specificity rather than eliminate them. The full elimination is most useful in fund vehicles, joint ventures, and other structures where the parties are sophisticated and the economic terms are heavily negotiated. What should our board do before year-end? For a Texas-domiciled corporation that has not yet acted on SB 29, the practical sequence is: (1) determine which provisions apply automatically based on listing status; (2) if private, evaluate whether to elect the codified business judgment rule; (3) determine eligibility for the three-percent derivative threshold and adopt it if the company qualifies; (4) add a Section 2.115 jury waiver paired with a forum selection clause designating the Texas Business Courts; (5) update inspection-rights provisions in the bylaws. The amendments themselves are not technically complicated; the timing window for adopting them narrows once a demand letter arrives. Defined terms. The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Business Judgment Rule Derivative Action Fiduciary Duty TBOC Books and Records Ultra Vires Jury Waiver Forum Selection Controlling Shareholder Certificate of Formation View the complete Texas Business Law Glossary → Related reading. Insights Texas Redomestication: The Quiet Migration from Delaware Practice Corporate Governance Podcast Episode 11: Texas Corporate Law Overhaul Before the next derivative demand arrives, the governance documents matter most. Fifteen minutes is enough to identify which SB 29 provisions fit your situation and what the amendment sequence should look like. Schedule a Call (682) 529-7177 This article is general information based on publicly available sources as of the publication date and is not legal advice for any specific situation. Outcomes depend significantly on the specific facts, entity structure, and timing involved. IRS guidance, regulatory positions, and case law continue to develop. Consult qualified legal counsel before making decisions that affect your specific situation. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn --- ## Selling Your Business in Texas: The Owner's Roadmap from Decision to Close URL: https://kraus.law/insights/selling-your-business-in-texas/ Corporate · M&A May 5, 2026 12 min read Selling your business in Texas: the owner's roadmap from decision to close. A business sale isn't a transaction, it's a 6-to-18-month process with decision points that permanently affect how much you walk away with. Here's what every phase looks like, what most sellers get wrong, and where the real money is made and lost. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Corporate Real Estate Employment Intellectual Property Tax Structuring If you read nothing else A business sale touches five practice areas simultaneously, corporate, real estate, employment, IP, and tax. The sellers who net the most are the ones who started preparing 12–18 months before they needed to. The three decisions that cost sellers the most: wrong deal structure (asset vs. stock), accepting an earnout without adequate protections, and discovering IP problems in due diligence instead of before it. All three are preventable. The process has six phases. Each one has decision points that cannot be revisited once you've moved past them. Call us: (682) 529-7177 A business sale is the largest financial event in most owners' lives. And it's also the one they're least prepared for, because they've never done it before. Buyers, whether strategic acquirers or private equity, do this constantly. They know the process, the leverage points, and the places where unprepared sellers give up value. Your job is to close that information gap before negotiations begin. This article walks through every phase of a Texas business sale: what happens, what the key decisions are, and where most sellers lose money. The goal is to give you a clear picture of the road ahead, so that when you do engage professionals, you're having an informed conversation, not learning on the buyer's clock. The six phases of a Texas business sale Phase 1 · 12–18 months before close Decision, valuation, and preparation This is the phase most sellers skip, and it's where the most value is created or destroyed. Before you talk to a single buyer or broker, you need three things. First, a realistic valuation. Not what you think the business is worth, but what a buyer will pay, which is based on your earnings, your growth trajectory, your customer concentration, and a dozen other factors a qualified appraiser will analyze. Second, a readiness assessment. Due diligence will expose everything: tax issues, employment liabilities, IP ownership gaps, lease assignability problems, litigation history, and accounting irregularities. Find these problems now, not in a buyer's data room. Third, a preparation plan. Whatever the readiness assessment uncovers, fix it. Clean up your cap table. Ensure the business's IP is properly owned by the company, not by you personally or by contractors who never signed an assignment. Formalize key employee relationships. Organize three years of clean financial records. Sellers who prepare for 12–18 months typically achieve better multiples and lose less in the due diligence discount than those who sell reactively. Phase 2 · 6–12 months before close Positioning and process selection This phase answers two questions: who are the right buyers, and how do you reach them? Targeted outreach (approaching specific strategic buyers directly) is appropriate for businesses where there are obvious acquirers and the seller wants a controlled, confidential process. A broker-run process , running a structured auction with multiple bidders, typically produces better prices for businesses in the $5M–$50M range because it creates competitive tension. A controlled auction with a small number of pre-selected buyers offers a middle path: some competition, greater confidentiality. The choice affects price, timeline, and the seller's negotiating position throughout. It also has legal implications: the process you run affects what representations you can make about the business, what your confidentiality obligations are, and what happens if the process fails. Deciding on process before engaging buyers, not after, is essential. Phase 3 · 3–6 months before close Letter of intent and due diligence The LOI is signed. The exclusivity clock is running. This is the most intense phase of the process, and the one where deals most frequently die or get repriced. The data room needs to be complete, organized, and accurate. Every document you provide is being analyzed for risk. Gaps are interpreted as problems. Inconsistencies between what the buyer was told in the process and what appears in due diligence become leverage for price reductions. Quality of earnings , a third-party analysis of whether your reported earnings are real, recurring, and clean, has become standard. If you haven't done this yourself before the process, the buyer's QoE analysis will find issues on their schedule, not yours. Key employee risk is evaluated here. If one or two people are essential to the business's continued performance, the buyer will want assurances about retention, and those conversations start now. Due diligence is the phase where the LOI price becomes an opening bid, not a contract price. Phase 4 · 30–60 days before close Definitive agreement and final negotiation The purchase agreement, whether an asset purchase agreement, a stock purchase agreement, or a membership interest purchase agreement, is the legal document that controls every dollar you receive and every obligation you retain. It is drafted by the buyer's lawyers and, by default, favors the buyer. Key negotiated terms: purchase price adjustments (working capital targets, net debt adjustments), representations and warranties (scope, knowledge qualifiers, materiality thresholds, survival periods), indemnification obligations (caps, baskets, escrow holdbacks), restrictive covenants (what you can and cannot do after closing), and any earnout provisions. This is the phase where representation and warranty insurance, which transfers risk from the seller's escrow to an insurance policy, is evaluated. In larger deals, it's often worth the premium. The final purchase agreement reflects the relative leverage of the parties at the moment of signing. Everything before this phase was negotiating toward this document. Phase 5 · Closing day Transfer, sign, and wire Closing day is largely logistical, but that doesn't mean it's simple. In a stock sale, the primary deliverable is the transfer of ownership interests, a bring-down of representations, and any ancillary agreements (employment agreements, transition services agreements, consulting arrangements). In an asset sale, closing involves the transfer of each individual asset: equipment, inventory, accounts receivable, contracts (each of which may require third-party consent to assign), intellectual property, leases, and real estate. The closing statement reconciles the final purchase price after working capital adjustments, debt payoffs, and prorations. The wire transfer of proceeds typically happens same-day or next-day. Post-closing, a portion of the price, typically 10–15%, goes into escrow to cover potential indemnification claims. That escrow is released (usually) after 12–18 months, subject to any open claims. Phase 6 · 30–180 days post-closing Transition, earnout, and the year after the sale The closing isn't the end of the deal. If you've agreed to a transition period, whether as an employee, consultant, or seller in a training role, your obligations under that agreement are real and legally enforceable. Earnout periods require careful attention: the buyer now controls the business, and you need to monitor whether the earnout metrics are being tracked accurately and whether the buyer is making decisions that affect them. Non-compete and non-solicitation obligations typically begin at closing and run for two to five years. In Texas, these are enforceable if they meet the requirements of the Covenants Not to Compete Act, reasonable scope, geography, and duration, ancillary to an otherwise enforceable agreement. Tax planning isn't over at closing: installment sale elections, QSBS exclusions, and reinvestment strategies can significantly affect your after-tax outcome and should be addressed with your tax advisor immediately after close. The five decisions that determine your net proceeds Most sellers focus on the purchase price. Sophisticated sellers focus on the five decisions that affect what they deposit. 1. Asset sale or stock sale This is the single highest-stakes structural decision in any business sale. Buyers almost always prefer asset sales because they get a stepped-up tax basis, they leave the seller's historical liabilities behind, and they can be selective about which assets and employees they acquire. Sellers often prefer stock sales because the entire gain is typically taxed at capital gains rates rather than a mix of ordinary income and capital gains, and there's no need to individually assign every contract and license. The difference in after-tax proceeds can be significant. On a $5 million deal, the structural choice alone can shift your net proceeds by $300,000 to $600,000 or more. This decision needs to be modeled with your tax counsel early, not negotiated for the first time after you've accepted a term sheet. 2. The valuation methodology and earnings base The purchase price is almost always a multiple of earnings. But "earnings" is a negotiated number. Add-backs, owner compensation in excess of market rate, one-time expenses, personal expenses run through the business, normalized working capital, can meaningfully increase the earnings base the multiple is applied to. A difference of $200,000 in the EBITDA base at a 5x multiple is a $1 million difference in purchase price. The seller who has done their own quality-of-earnings work before the process, who can defend every add-back with documentation, is in a fundamentally stronger position than the seller relying on buyer's QoE analysis to determine the earnings base. 3. The due diligence discount In theory, the LOI price is the purchase price. In practice, buyers use due diligence findings to negotiate price reductions. The pattern is predictable: buyer finds an issue, buyer argues the issue represents a risk that the LOI price didn't account for, buyer requests a reduction. Some reductions are legitimate. Many are leverage tactics. Sellers who have done thorough pre-sale diligence, who know what a buyer will find and have either fixed it or prepared a defensible explanation, lose significantly less in the due diligence phase than those who are surprised by the findings alongside the buyer. 4. Representations, warranties, and the escrow The reps and warranties in a purchase agreement are not boilerplate. They are the seller's contractual statement about the condition of the business. If a rep turns out to be wrong, and something material was omitted, the buyer has an indemnification claim against the seller. The escrow holdback exists to fund those claims. The scope of reps, the qualification of reps with knowledge qualifiers and materiality thresholds, and the survival period (how long after closing the buyer can bring a claim) are all heavily negotiated. Getting these terms right is worth more than most sellers realize, because an overly broad rep with a long survival period is a contingent liability that sits on your balance sheet for years after closing. 5. The earnout, or the absence of one Earnouts are the most misunderstood component of a business sale. A well-structured earnout, with clear metrics, strong buyer conduct obligations, an independent auditor, and a fast dispute resolution process, can bridge a gap between buyer and seller on price. A poorly structured earnout is a price reduction that creates the illusion of being something else. The best earnout is the one you didn't need to accept. The second-best is the one with ironclad buyer conduct provisions. What no one tells you about due diligence Business owners often think of due diligence as a formality, the buyer confirming what they already know. That's not how buyers think about it. Due diligence is the buyer's systematic attempt to find reasons to reduce the price, restructure the deal, or walk away. Every request is a probe. Every gap is a signal. The areas that most frequently cause deal issues in my experience: intellectual property that isn't cleanly owned by the entity (contracts with software developers that lack work-for-hire provisions; trademarks registered in the owner's personal name); employment practices that expose the company to wage-and-hour or discrimination claims; real estate leases with anti-assignment clauses that require landlord consent; related-party transactions that weren't properly disclosed or authorized; and accounting that hasn't been prepared on a consistent basis across the periods being reviewed. None of these are fatal if you find them before the process. All of them are expensive if the buyer finds them during it. The role of each professional on your team A business sale requires a team. The roles are distinct, and conflating them, or skimping on any of them, is expensive. Your M&A attorney negotiates and drafts the purchase agreement, advises on deal structure, and coordinates the legal due diligence response. This is not your general business attorney unless that person has specific M&A experience, the purchase agreement is a specialized document that requires specialized counsel. Your CPA and tax advisor models the tax implications of the deal structure, advises on the asset vs. stock decision, manages the quality-of-earnings process, and handles post-closing tax planning including installment sale elections and reinvestment strategies. Your investment banker or business broker (if you use one) manages the process, identifies buyers, prepares the confidential information memorandum, and runs the competitive bidding. Their value is in creating the market, the competitive tension that supports the price. On smaller deals, a broker is often skipped; on larger ones, their fee is typically worth the price premium they generate. Your fractional GC or corporate attorney , in my case, that's me, manages the corporate and governance side: cleaning up the cap table, ensuring proper board authorization, handling the intellectual property assignments, reviewing and advising on employment matters, and coordinating across the team. In transactions that touch real estate, employment, or IP in meaningful ways, those specialists are brought in from Scale's practice groups. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help One firm coordinates the entire transaction. The corporate and transactional framework — deal structure, purchase agreement negotiation, cap table cleanup, governance resolutions, and coordination with tax, IP, employment, and real estate counsel — all runs through one relationship. When specialized expertise is needed, Scale LLP's attorneys in those practice areas step in. The deal stays coordinated, and the seller has one point of contact with visibility across the whole process. The conversation starts with understanding what you're trying to accomplish and whether the business is ready for the market. Schedule a Call Going deeper Questions I hear from business owners thinking about a sale. Should I sell the assets or the stock of my Texas business? This is the most consequential structural decision in any business sale, and the answer usually depends on who has more leverage. Buyers strongly prefer asset sales because they get a stepped-up tax basis, leave the seller's historical liabilities behind, and can choose which contracts and employees they acquire. Sellers often prefer stock sales because the entire gain is typically taxed at capital gains rates, rather than a mix of ordinary income on some assets and capital gains on others, and there's no need to individually assign every contract, license, and lease. In practice, asset sales are more common for smaller transactions, and stock sales (or their LLC equivalent, membership interest sales) become more common as deal size increases. The tax difference can be significant, sometimes 10–15 percentage points of net proceeds, so this decision needs to be made with your tax attorney and accountant early, not at the closing table. How is a private Texas business typically valued for a sale? Most private business sales use an earnings-based valuation, typically a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) or SDE (seller's discretionary earnings, which adds back owner compensation and personal expenses). The multiple depends on industry, growth trajectory, customer concentration, recurring revenue, and perceived risk. A stable service business might trade at 3–5x EBITDA; a software company with strong recurring revenue might trade at 8–12x. Asset-heavy businesses often use asset-based approaches. The critical point: buyers and sellers almost always disagree on the right multiple and what belongs in the earnings base. Getting an independent quality-of-earnings analysis before going to market gives you a defensible number and surfaces issues you'd rather find before a buyer does. What is a letter of intent and is it legally binding? A letter of intent (LOI) establishes the basic commercial terms before the parties invest in full due diligence and legal drafting. It covers purchase price, deal structure, payment terms, exclusivity period, key conditions, and a target closing timeline. Most LOIs are non-binding on price and structure, the idea is to agree on terms before spending money on lawyers. However, certain provisions are typically binding: exclusivity (preventing the seller from shopping the deal during due diligence), confidentiality, and sometimes a break-up fee. The distinction matters. I've seen sellers treat a signed LOI as a done deal, and then be shocked when the buyer retrades the price after due diligence. An LOI is the beginning of a negotiation, not the end of one. What does a buyer look at during due diligence? Due diligence covers financial records (3 years of tax returns, financial statements, accounts receivable aging, bank statements), legal documents (corporate records, operating agreements, ownership history, litigation, regulatory compliance), contracts (customer agreements, vendor contracts, leases, loan agreements, employment contracts), intellectual property (trademark registrations, patent filings, software ownership, trade secret documentation), employees (headcount, compensation, benefit plans, any employment claims), real estate (owned property title, lease terms and assignability), and taxes (federal and state filings, open audits). The process typically takes 30–60 days. A data room that's clean and complete signals a well-run business. One that's chaotic signals risk, and buyers price risk into the offer. What are representations and warranties, and what happens if one is wrong? Representations and warranties are factual statements the seller makes in the purchase agreement, about the accuracy of financials, the ownership of IP, the absence of undisclosed liabilities, the status of litigation, the enforceability of contracts, and dozens of other matters. If a rep turns out to be materially wrong, the buyer has an indemnification claim. Sellers want reps that are narrow, heavily qualified with knowledge qualifiers and materiality thresholds, and subject to short survival periods. Buyers want the opposite. The negotiation determines who bears the risk of things that are unknown at closing. Representation and warranty insurance has become common in larger deals as a way to shift this risk to an insurer, but it requires clean due diligence and adds cost. What is an earnout and when should I accept one? An earnout makes a portion of the purchase price contingent on the business achieving specific financial targets after closing, typically over one to three years. Buyers love earnouts because they shift risk to the seller. Sellers should approach them with significant caution. In my experience, earnouts frequently go unpaid, not because the business underperforms, but because the buyer (now in control) makes decisions that affect the earnout metrics in ways the seller didn't anticipate. If you accept an earnout, you need ironclad provisions governing how the business is operated during the earnout period, what the buyer cannot do that would affect the metric, and what dispute resolution process applies. An earnout on terms that don't address these issues is, in practice, a price reduction. How do I handle employees during the sale of my business? Most sellers don't disclose the sale to employees until late in the process, often not until shortly before closing, to avoid disruption and talent loss. In asset sales, employees are technically terminated and rehired by the buyer, which has implications for benefits, vesting, and WARN Act obligations for larger workforces. Key employee retention often needs to be negotiated as part of the deal terms. Employment agreements, non-competes, and confidentiality agreements with key employees need to be reviewed for assignability. The buyer will want key people to stay; the seller needs to understand what commitments the buyer is making to them. Employment counsel should be involved in any sale with more than a handful of employees. What happens to my business's intellectual property when I sell? In a stock sale, IP stays in the entity. In an asset sale, it must be expressly transferred. But in either case, due diligence will scrutinize IP ownership carefully. The most common issues I see: trademarks registered in the owner's personal name rather than the company's; software developed by contractors under agreements without work-for-hire provisions, meaning the contractor may own the copyright; trade secrets never documented or protected by confidentiality agreements; and patents that are pending, lapsed, or of uncertain scope. If your business value is substantially in its IP, get an IP audit before going to market. Discovering a title problem in due diligence is far more expensive than fixing it before the buyer's attorneys find it. How much will I net after a business sale in Texas? The gap between the headline price and what you deposit can be significant. Reductions include: transaction costs (legal fees, broker fees, accounting fees, typically 3–7% of deal size), taxes on the gain (federal capital gains on most proceeds in a stock sale; potentially a mix of ordinary income and capital gains in an asset sale, Texas has no state income tax, which is a meaningful advantage), escrow holdbacks (typically 10–15% held for 12–18 months to cover indemnification claims), working capital adjustments (if the business has less working capital at close than the agreed target, the price is reduced dollar-for-dollar), and debt payoff (existing business debt is typically paid from proceeds). The tax structure alone can shift your net proceeds by hundreds of thousands of dollars on a $5M deal. Model this before you accept an offer. Related reading Raising Capital in Texas Read Texas Business Law Explore Your Business Partner Wants Out. Now What? Read Intellectual Property at Scale LLP Explore Real Estate at Scale LLP Explore Employment Law at Scale LLP Explore The sellers who net the most start the earliest. One call to Chuck starts the process, and tells you exactly where you are on the timeline and what to do next. Schedule a Call (682) 529-7177 This article provides general information about business sales under Texas law and is not legal advice for your specific situation. Every business sale involves unique facts, deal structure, governing documents, and circumstances. If you are considering selling your business, consult an attorney licensed in your jurisdiction before taking action. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Starting a Business in Texas: The Legal Checklist Most Founders Skip URL: https://kraus.law/insights/starting-a-business-texas/ Corporate · Multi-Practice June 16, 2026 11 min read Starting a business in Texas: the legal checklist most founders skip. The filing is easy. What follows, the company agreement, the IP assignments, the employment infrastructure, the contracts that protect you when things go sideways, is where founders discover what they missed. A GC's honest checklist of what needs to happen, in what order, and why. By Charles R. Kraus Partner, Scale LLP Practice areas this article routes to Corporate Intellectual Property Employment Real Estate If you read nothing else Most founders get the formation right and skip everything after it. The three decisions that cost the most to fix later: no agreement between co-founders (the default Texas BOC rules were not written with your deal in mind); IP owned by founders personally rather than the company (every investor and every acquirer will find this); and no contractor IP assignment agreements (your developer may legally own your product). None of these require a lawyer to understand. All of them require one to fix correctly, and the cost of the fix often increases as time passes. Call us: (682) 529-7177 Entity selection: the decision that shapes everything downstream The entity type you choose determines how you're taxed, how you raise capital, how decisions are made, and how hard it is to add partners or sell the company. Most Texas founders default to an LLC without thinking through whether it's the right structure for where they want to go. Texas LLC Most common · Recommended for most founders Tax treatment Pass-through by default; can elect S-corp or C-corp taxation Liability protection Yes , personal assets separate from business debt Governance Flexible, governed by operating agreement; minimal statutory formality Best for Operating businesses, professional services, real estate, family businesses, most SMBs Delaware C-Corp Venture-backed · Pre-IPO Tax treatment Corporate-level tax plus shareholder tax on distributions (double taxation) Liability protection Yes Governance Board of directors, officers, annual meetings, stock ledger, more formal Best for VC-funded startups, companies planning to grant ISOs, companies planning to go public S-Corporation Tax election · Restricted use Tax treatment Pass-through; can reduce self-employment tax with reasonable salary structure Liability protection Yes Governance Corporate formalities required; stricter ownership rules Best for Profitable service businesses where SE tax savings justify the added complexity; max 100 shareholders, one class of stock The right answer depends on your tax situation, your ownership structure, whether you'll take outside investment, and whether you want to eventually sell. It's worth a single conversation with a business attorney and your accountant before you file, because converting from one structure to another later is possible but has tax and legal consequences that are almost always more expensive than getting it right at formation. The formation checklist Three phases, ordered by when each item needs to happen. The "flag" note under each item is the specific problem that shows up when it's skipped. Phase 1, Formation Before you open a bank account or sign your first contract Day One File Certificate of Formation with Texas Secretary of State For a Texas LLC: Form 205. For a corporation: Form 201. $300 filing fee. Sets the legal name, registered agent , and management structure. Can be filed online at sos.state.tx.us. Appoint a registered agent with a Texas street address Required by law. Must have a physical Texas address and be available during business hours. Professional registered agent services run $50–$150/year and keep your personal address off the public record. Obtain an EIN from the IRS Federal Employer Identification Number , required to open a business bank account, hire employees, and file taxes. Free, immediate, applied for at irs.gov. Do not pay a third party to do this for you. Draft and sign the operating agreement (LLC) or organizational documents (corp) The foundational governance document. For a single-member LLC it establishes basic operating rules and confirms sole ownership. For a multi-member LLC it must address: ownership percentages, capital contributions, profit and loss allocation, decision-making authority, transfer restrictions, and what happens if a member leaves. Without this: The Texas BOC default rules govern, treating all members equally regardless of contribution, requiring unanimity for major decisions, and providing no buyout mechanism. These defaults exist to fill gaps, not to reflect your actual agreement. Open a dedicated business bank account Required to maintain the liability protection your entity provides. Commingling personal and business funds is one of the primary grounds for piercing the corporate veil, a court ruling that holds you personally liable for the business's debts. All business income and expenses run through the business account, not your personal one. Run a federal trademark clearance search on your business name and brand Filing an LLC name in Texas prevents another Texas entity from using that name. It does not give you trademark rights and does not prevent a business in another state from using the same name. A clearance search identifies conflicts before you invest in a brand. File a federal trademark application promptly if the name is clear. Without this: You build a brand for two years, receive a cease-and-desist from a registered trademark owner in another state, and face a rebrand at the worst possible moment, when the business has momentum and the name has value. Phase 2, First 90 Days Before your first hire, your first contractor, or your first paying client First 90 Days Assign all pre-formation IP to the company Any intellectual property developed before the company was formed, software, designs, brand assets, processes, is owned by the person who created it, not the company, unless it is formally assigned. This includes work the founder did on their own time before forming the entity. The assignment is a written agreement transferring ownership from the individual to the company. Without this: The company's most valuable assets may legally belong to the founders personally. Every investor and every acquirer will discover this in due diligence . Draft your master services agreement or client contract The contract governing your relationship with clients or customers. At minimum it should address: scope of work and change order process; payment terms and late payment consequences; IP ownership of deliverables; limitation of liability; dispute resolution; and termination rights. Use your own form, a client's form is drafted to protect the client. Draft your independent contractor agreement with IP assignment clause Any contractor, freelancer, or vendor who creates anything, code, content, design, systems, must sign an agreement that explicitly assigns ownership of all work product to your company. Under U.S. copyright law, a contractor owns their work product by default unless a written agreement says otherwise. Without this: Your web developer owns your website. Your designer owns your logo. Your engineer may own your product. This is discovered in due diligence, not before. Draft your confidentiality and NDA template A standard NDA for use with potential partners, vendors, and clients before sensitive information is shared. One-way (protecting only your information) or mutual (protecting both parties) depending on the relationship. Your NDA should define what is confidential, the obligations of the receiving party, the term of the obligation, and the remedy for breach. Draft employment agreements and offer letter templates for first hires At minimum, employment agreements for key hires should address: compensation and benefits; IP assignment (all work created during employment belongs to the company); confidentiality obligations; at-will status confirmed; and, where appropriate, non-solicitation of clients and employees. Non-competes, if used, must comply with the CNCA, see Article 7 in this series. Register for Texas Franchise Tax and understand your filing obligations Most Texas entities are subject to the franchise tax. The no-tax-due threshold was $2.65M in annualized revenues as of 2026, businesses below that threshold must still file a public information report annually. Failure to file results in forfeiture of the right to conduct business in Texas, which can affect your ability to enforce contracts and maintain liability protection. Phase 3, Ongoing Corporate Hygiene Annual and event-triggered obligations that preserve what you built Ongoing File annual Public Information Report with the Texas Comptroller Due by May 15 each year for most entities. Confirms your registered agent, principal office address, and officer/member information. Failure to file results in forfeiture of the right to conduct business in Texas and can, in some circumstances, expose owners to personal liability for debts incurred during the forfeiture period. Maintain corporate formalities, don't commingle The liability protection an LLC or corporation provides depends on the entity being treated as a separate legal person. This means separate bank accounts, separate financial records, no personal expenses paid from the business account without proper documentation, and business decisions documented in resolutions or written consents where appropriate. Review and renew trademark registrations on schedule Federal trademark registrations require a Declaration of Use filed between the 5th and 6th year after registration, and renewal every 10 years. Missing these deadlines results in cancellation of the registration. Set calendar reminders well in advance. Your IP attorney should be tracking these, but the obligation is yours. Update operating agreement when ownership or governance changes Adding a member, removing a member, changing profit allocations, adjusting management rights, all of these require an amendment to the operating agreement. An operating agreement that doesn't reflect the current deal is more dangerous than no operating agreement at all, because it creates a documented record of an arrangement that no longer exists. Trigger events that require an operating agreement update: new investment, addition or departure of a member, change in management structure, grant of equity to an employee, any agreement to allocate ownership differently than the current document reflects. Review all contracts annually and before any major transaction Key contracts, client MSAs, major vendor agreements, leases, loan agreements, employment agreements with key people, should be reviewed annually and before any significant transaction (sale, investment, major hire). Contracts accumulate over time; the one with the anti-assignment clause you negotiated away three years ago is the one that will matter when a buyer asks for clean title to all your agreements. The question founders get wrong most often I've heard some version of this question from almost every founder I've worked with early in the process: "Do I really need all of this right now? We're just starting out." The honest answer is that most of it doesn't cost much to do right at the beginning, an operating agreement, an IP assignment, a contractor template. The cost is not in the documents. The cost is in the cleanup when the documents aren't there. An operating agreement that wasn't signed when the business was formed turns into a dispute about who owns what when one co-founder wants to leave or when a buyer wants clean title. An IP assignment that wasn't executed at formation turns into a negotiated solution, with the founder who has leverage, not you, at the worst possible moment. The cost of getting it right at the start is a fraction of the cost of fixing it when it matters. The two things worth doing immediately, before anything else: form the entity properly, and get the operating agreement signed. Everything else can follow in sequence. But the operating agreement should exist before the first dollar of revenue, the first hire, and certainly before the first time two co-founders have a disagreement about something that isn't in writing. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help Formation is where the terms are set for everything that follows. Entity structure, IP ownership, and founding-team agreements made in the first weeks determine what options are available — and what options are foreclosed — years later. The difference between a business that can cleanly raise capital, bring on partners, or sell, and one that requires expensive restructuring first, is almost always a formation decision that seemed minor at the time. The work covers entity selection and formation, operating agreements, founder equity structures, IP assignment, initial employment frameworks, and the regulatory registrations specific to your industry and location in Texas. One call to scope the work. Schedule a Call Going deeper Questions I hear from Texas founders getting started. Should I form an LLC or a corporation in Texas? For most Texas small businesses and solopreneurs, a Texas LLC is the right starting structure. It provides liability protection, pass-through taxation by default, operational flexibility, and simpler governance than a corporation. A Texas C-corporation (or more commonly a Delaware C-corp) makes sense when you plan to raise venture capital, grant incentive stock options, or anticipate going public. An S-corporation is a tax election, not an entity type, with restrictions that make it unsuitable for many growing businesses. The default advice to form a Delaware C-corp for everything is wrong for most Texas businesses without VC ambitions. The right entity depends on your ownership structure, tax situation, and growth plans. Does a Texas LLC need an operating agreement? Technically no, the Texas BOC provides default rules. Practically yes, you need one. The defaults treat all members equally regardless of contribution, require unanimity for major decisions, and provide no buyout mechanism for a departing member. The operating agreement governs how decisions are made, how distributions are allocated, what happens when a member wants to leave or sell, and how the company handles a member's death or incapacity. For a single-member LLC it's less critical but still valuable. For a multi-member LLC, operating without one is a documented path to co-founder litigation. What taxes does a Texas business have to pay? Texas has no state income tax, a significant advantage. Most entities doing business in Texas are subject to the Texas Franchise Tax (margins tax) if annualized revenues exceed $2.65M; businesses below that threshold must still file a public information report annually. At the federal level, LLC income flows through to members' personal returns by default, subject to income tax and self-employment tax. The tax structure of your entity, LLC taxed as sole proprietorship, partnership, S-corp, or C-corp, significantly affects the total burden and should be modeled before formation. Do I need a buy-sell agreement for my Texas business? If you have any co-owner, any percentage, you need buy-sell provisions. A buy-sell agreement establishes what happens to an owner's interest on a triggering event: death, disability, divorce, departure, bankruptcy, or a desire to sell to a third party. Without one, those events produce outcomes controlled by state law and courts, almost never what the remaining owners would have chosen. Key provisions: triggering events covered, valuation method, funding mechanism (typically life insurance for death triggers), and a right of first refusal before a third-party sale can proceed. What contracts does a new Texas business need? Five core contracts for most businesses: a master services agreement or terms of engagement with clients; an independent contractor agreement with an IP assignment clause for any freelancers; a confidentiality agreement (NDA) template for use before sharing sensitive information; employment agreements for key employees including IP assignment and appropriate restrictive covenants; and vendor agreements for significant ongoing vendor relationships. The most expensive contract mistake new businesses make is using the client's form, it was drafted to protect the client, not you. Every business should have its own forms from the start. What is the difference between an employee and an independent contractor in Texas? Classification is determined by the actual nature of the working relationship, not by what the parties call it in their agreement. The IRS multi-factor test looks at behavioral control (does the business direct how and when work is performed), financial control (does the business control the economic aspects of the worker's job), and the type of relationship. Misclassifying an employee as a contractor exposes the business to back taxes, penalties, and interest from the IRS and Texas Workforce Commission, plus employment law liability. The label in the agreement doesn't control; the facts do. How do I protect my business name and brand in Texas? Filing an LLC name in Texas reserves it with the Secretary of State, it does not give you trademark rights and does not prevent a business in another state from using the same name. Federal trademark registration with the USPTO provides nationwide protection. Before investing in a brand name, run a clearance search to identify conflicting registrations. Register the mark as early as possible, trademark rights are strengthened by use and registration, and early registration establishes your priority date against later filers. What is a registered agent and do I need one for my Texas business? Yes, every Texas LLC and corporation must maintain a registered agent with a physical Texas street address, available during business hours to receive legal and government correspondence including lawsuits. You can serve as your own registered agent if you have a Texas address and are consistently available. A professional registered agent service ($50–$150/year) keeps your personal address off the public record and ensures nothing is missed. Failure to maintain a registered agent results in loss of good standing with the state. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Texas Business Organizations Code Limited Liability Company Corporation Certificate of Formation Company Agreement Bylaws Registered Agent Foreign Entity Member Manager Series LLC Closely Held Corporation For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Texas Business Law Explore Non-Competes in Texas: What Employers Need to Know Read Selling Your Business in Texas: The Owner's Roadmap Read Formation is the cheapest time to get this right. Everything on this checklist is easier before the business has revenue, employees, and investors. One call, fifteen minutes, and you'll know what to do first. Schedule a Call (682) 529-7177 This article provides general information about business formation and legal compliance in Texas and is not legal advice for your specific situation. Entity selection, tax treatment, and legal requirements vary based on your specific business type, ownership structure, and circumstances. Consult an attorney and a CPA before making formation decisions. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## The Texas Business Court Two Years In: What 26 Months of Decided Cases Mean for the Eighth Division URL: https://kraus.law/insights/texas-business-court-eighth-division-18-month-update/ Texas Business Court · Eighth Division · Update May 10, 2026 14 min read The Texas Business Court two years in: what 26 months of decided cases mean for the Eighth Division. Two years ago, complex Texas commercial disputes moved through the same rotating district court dockets as criminal arraignments and family matters. Today, a specialized court with judges drawn from the commercial bar is publishing written opinions on force majeure, buy-sell enforcement, fiduciary duty, and the meaning of "qualified transaction." Five decisions tell the story of what's changed, including one resolved in the Fort Worth-based Eighth Division that's directly relevant to closely held businesses in Hood County and the surrounding corridor. By Charles R. Kraus Partner, Scale LLP Practice areas this article covers Texas Business Law Governance Cross-Border If you read nothing else The Texas Business Court has been operational for twenty-six months. 326+ filings, 71 written opinions, the first bench trial concluded, the first jury trial begun, and the first directed verdict. House Bill 40 (effective September 1, 2025) lowered the qualified-transaction threshold from $10M to $5M and broadened subject-matter jurisdiction. The Eighth Division (Fort Worth) covers eighteen counties of north-central Texas including Hood, Tarrant, Parker, Erath, Johnson, and Somervell Counties, the corridor running west and south from Fort Worth. Five decided cases illustrate what specialized commercial judicial review looks like: Crain v. Northern (Eighth Division, January 2026, buy-sell enforcement); Marathon Oil v. Mercuria (force majeure); Reed v. Rook TX (jurisdictional limits); Preston Hollow Capital v. Truist (freedom of contract); Quintero v. Urban Infraconstruction (first directed verdict). For Granbury and DFW-area businesses, the practical implications are concrete, forum-selection clauses, sharpened shareholder agreements, board documentation discipline. Call us: (682) 529-7177 In June 2025, two 50/50 owners of a north Texas real estate management company found themselves in the kind of dispute that has played out a thousand times across the state. Michael Crain and William Northern owned three entities together, a realty company and two property management subsidiaries, under company agreements that contained mandatory buy-sell procedures . When Crain accused Northern of breaching the "direct competition" clause by acquiring a country club and adjacent property, Northern responded by exercising his contractual right to buy Crain out. He delivered a properly tendered offer notice. Under the company agreements, Crain had thirty days to either accept the offer or counter, elect to buy Northern out instead. He did neither. When the thirty-day window closed, Northern delivered cashier's checks for the prescribed amount and demanded closing. Crain refused. Instead, he filed suit. The case was filed in the Texas Business Court 's Eighth Division, the division based in Fort Worth that covers eighteen counties of north-central Texas, including Hood, Tarrant, Parker, Erath, and Johnson Counties. On January 29, 2026, the Eighth Division granted Northern summary judgment for specific performance. The company agreements were valid and enforceable, the buy-sell procedure had been triggered properly, and Crain's failure to respond was, in the court's words, an intentional forfeiture of his membership interest . The court ordered Crain to assign his shares to Northern and treated the closing as having occurred on the date the agreements specified. Two years ago, that same dispute would have moved through a Hood County or Tarrant County district court docket alongside personal injury claims, criminal arraignments, and family law matters, with rotating judges and no requirement that any opinion be published. Today, the dispute resolved in a specialized commercial court with judges drawn from the commercial bar, and the published opinion now sits in a body of decided Texas business-law authority that any future business owner can consult. That's the change. This article looks at what twenty-six months of Texas Business Court operations look like in practice, the cases decided, the patterns emerging, the implications for a closely held Texas business sitting inside the Eighth Division's catchment area. Where the Court is, two years in The Texas Business Court opened its doors on September 1, 2024, created by House Bill 19 of the 88th Legislature and codified at Texas Government Code Chapter 25A . The structure: a single statewide specialized trial court with eleven geographic divisions (five currently operational), each staffed by two judges with at least ten years of commercial litigation, business transaction, or judicial experience. Judges issue written opinions in dispositive rulings when requested or when the matter is "important to the jurisprudence of the state." Appeals route to the new Fifteenth Court of Appeals, which has exclusive statewide jurisdiction over Business Court matters. The numbers, as of February 28, 2026 (eighteen months in): 326+ Cases filed Since September 1, 2024 (185 in year one, 141 more in year two to date). 71 Written opinions Volume of available authority doubling roughly every six months. ~12 mo Avg time to disposition Faster than comparable matters in the regular district courts. ~20 Cases in the Eighth Division Third-busiest division by case volume, after Houston and Dallas. The qualitative milestones matter too. The first bench trial concluded in November 2025: Marathon Oil obtained a declaratory judgment against Mercuria Energy America, with a Third Division judge ruling that Marathon's failure to deliver natural gas during 2021's Winter Storm Uri was excused by the contract's force majeure clause. Four-day trial, written opinion, the Business Court's first major commercial bench-trial precedent. The first jury trial began February 10, 2026 in the Eleventh Division (Houston). A second jury trial in the First Division (Dallas) ended in a directed verdict for the defense, the first time a Business Court judge directed a verdict against a plaintiff at trial. The first constitutional challenge to the court's structure is pending in Brown v. Exxon Mobil Corporation , with the plaintiff arguing that the appointment-rather-than-election framework violates state and federal constitutional provisions. Filing distribution remains uneven. The Eleventh Division (Houston) holds roughly 40% of total filings; the First Division (Dallas) another 28%. The remaining ~30% splits across the Third (Austin), Fourth (San Antonio), and Eighth (Fort Worth) Divisions. The pattern that's emerging: a court that's getting busier each quarter, that's developing a meaningful body of written authority, that's resolving disputes faster than the regular district courts (most cases are resolved within twelve months), and that's increasingly being used as the forum of choice when complex Texas commercial disputes need adjudication. The HB 40 expansion, what changed September 1, 2025 The original Business Court was deliberately narrow. The $10 million qualified-transaction threshold was set high enough to keep the court focused on truly significant commercial disputes; the subject-matter categories were limited to specific TBOC provisions, governance disputes, and the publicly-traded-company carve-out. The combined effect was that a substantial number of meaningful Texas commercial disputes, disputes that would benefit from specialized judicial review but didn't quite reach the dollar threshold or didn't fit the narrow subject-matter list, were stuck in the regular district courts. House Bill 40, passed by the 89th Legislature with strong bipartisan support and effective September 1, 2025, broadened the court's reach significantly: The qualified-transaction threshold dropped from $10 million to $5 million for most case categories. Publicly-traded companies remain at $0, they qualify regardless of dollar amount. Subject-matter jurisdiction expanded to include intellectual property disputes, claims under the Texas Uniform Trade Secrets Act, arbitration-related disputes, and a clarified set of governance and derivative-action categories. Jurisdictional dispute resolution streamlined, the Texas Supreme Court was tasked with adopting rules for "prompt, efficient, and final" determination of Business Court jurisdiction, addressing the early-case-jurisdiction-fight problem that consumed significant judicial resources in year one. Procedural integration deepened, interlocutory appeals, recusal procedures, and document-handling rules brought into closer alignment with Texas Civil Practice and Remedies Code procedures applicable to other district courts. Judicial transition smoothed, incoming Business Court judges may begin work up to thirty days before their term technically starts, allowing for training and case transition. The practical effect: a court that's now genuinely accessible to a wider range of Texas commercial disputes. A $6 million breach-of-contract case that would have been forced into a regular district court under the original threshold is now eligible for Business Court adjudication. Trade-secret disputes, historically routed through a tangle of state and federal venue choices, now have a specialized state-court forum. Intellectual property disputes can route through the Business Court at the parties' option. For closely held businesses operating in the Eighth Division's catchment area, the effect is even sharper. Disputes that previously would have moved through Hood County, Tarrant County, or Parker County district courts, or that would have been routed to federal court when ordinary diversity rules permitted, now have a third option: a specialized commercial court with judges trained to read sophisticated commercial agreements and a meaningful body of written authority developing alongside. What the Eighth Division looks like The Eighth Division of the Texas Business Court sits in Fort Worth and covers eighteen counties of north-central Texas. The geographic reach matters. The Eighth Division catchment includes Tarrant, Parker, Hood, Erath, Johnson, Somervell, Wise, Palo Pinto, Stephens, Eastland, Comanche, Hamilton, Bosque, Hill, Ellis, Navarro, Limestone, and Freestone Counties , essentially the corridor running west, south, and southwest from Fort Worth through to Granbury, Stephenville, and Cleburne. The two Eighth Division judges bring substantial commercial experience to the bench. Both have backgrounds in complex commercial litigation at major Texas firms, one a longtime shareholder at a Tarrant County boutique, the other a partner at a major Fort Worth firm where he co-chaired the litigation practice. Combined judicial experience: roughly sixty years of complex commercial work before either ever sat as a judge. That matters for two practical reasons. First, the caliber of judicial review in the Eighth Division on commercial matters is substantively different from what most regional Texas businesses have historically received in district court. Specialized commercial backgrounds mean specialized commercial reading, judges who have themselves drafted, negotiated, and litigated the kinds of agreements being placed before them. The Court's published opinions over its first eighteen months have been notably concise (averaging just under 19 pages per a comprehensive third-party analysis) and consistently invoke "plain language" interpretation as their analytical anchor. That's not the rotating-docket approach to commercial disputes; it's how commercial counsel resolves commercial disputes. Second, the bench-exchange procedure , regular reassignments to balance dockets across the Court, means that even cases filed in the busiest divisions sometimes get heard by Eighth Division judges. An Eleventh Division case (Houston) might end up in front of an Eighth Division judge. An Eighth Division case might be heard by a judge from another division. The bench is treated as one statewide bench, divided geographically for filing purposes but functionally integrated for adjudication. For a Granbury or DFW-area business, the practical implication is straightforward: the specialized commercial review available in Texas now isn't a Houston or Dallas thing. It's a statewide thing that includes the Eighth Division. A business sitting in Hood County that has a $6 million contract dispute with a counterparty in Tarrant County can file in the Eighth Division and have that dispute heard by a judge whose entire career has been spent in commercial work. Five lessons from decided cases What does specialized commercial judicial review look like in practice? Five decisions from the Court's first eighteen months illustrate the texture of the work. Lesson 1, Buy-sell clauses are enforceable as written. The Crain v. Northern decision the article opened with was decided by the Eighth Division on January 29, 2026. The structural lesson is one of the oldest in Texas commercial law: when sophisticated parties write a contract specifying procedures and consequences, courts enforce what they wrote. What's notable is the cleanness of the result. Crain refused to respond to a properly tendered offer; the company agreement said failure to respond meant forfeiture; the Court ordered specific performance . No protracted litigation about ambiguity, no extended discovery into intent, no creative theory of partial performance. Buy-sell clauses are real, properly drafted ones produce predictable outcomes, and the Eighth Division will enforce them as written. For closely held businesses with multiple owners, the lesson runs both ways. If your company agreement contains a mandatory buy-sell with response deadlines, those deadlines are real; missing them isn't an inconvenience, it's a forfeiture. Conversely, if your buy-sell procedures are loosely drafted or contain ambiguous response mechanics, the Court will read what you wrote, which is reason to revisit them now. Lesson 2, Specialized judges read commercial contracts the way commercial lawyers do. The Marathon Oil v. Mercuria force-majeure case was the Texas Business Court's first bench trial, held in November 2025 before Judge Melissa Andrews, sitting by designation in the Eleventh Division in Houston. The dispute: Marathon Oil failed to deliver natural gas to Mercuria during Winter Storm Uri in 2021, citing force majeure. Mercuria sued for the value of the missed deliveries (roughly $17.4 million). Marathon counter-sought a declaratory judgment that its non-performance was excused. The Court's analysis turned on the contract's "pipeline delivery" clause and the parties' confirmation procedures. The Court held that Marathon's clause had become part of the integrated agreement (Mercuria's silence under a confirmation procedure constituted acquiescence), and that Marathon had made "reasonable efforts" within the meaning of the contract. Marathon won the declaratory judgment. What's notable is the Court's analytical approach. The opinion drilled into the parties' actual contracting practice, how confirmations worked, what each side communicated, what the integrated agreement said about non-performance during force majeure events. That's how commercial counsel reads commercial contracts. The substantive judgment that gets applied to the agreement is qualitatively different from a rotating-docket court trying to handle commercial disputes alongside personal-injury and family-law matters. Lesson 3, This is a real specialized court, not a general-purpose forum. The Reed v. Rook TX, LP decision (August 2025) demonstrates the Court's willingness to enforce its jurisdictional limits even when both sides arguably want it to take the case. Reed had won a $7.5 million Texas lottery jackpot and brought suit against Rook TX and other defendants alleging that an earlier $95 million jackpot had been fraudulently claimed. After the plaintiff amended the petition in ways apparently designed to test the Court's jurisdiction, the Court reconsidered and remanded. The holding was technical: the Court lacked qualified-transaction jurisdiction because the value of the relevant consideration didn't meet the threshold; supplemental jurisdiction wasn't available because the plaintiff hadn't agreed to it; and trade-regulation jurisdiction wasn't triggered because the alleged negligence per se claim was a tort claim rather than a trade-regulation claim, even assuming the underlying statutes were trade-regulation laws. The structural lesson: the Texas Business Court is not a forum where any sufficiently complex commercial dispute can be parked. It has specific subject-matter and dollar-threshold requirements, and the Court will enforce them. Counsel considering filing or removing to the Business Court need to do the jurisdictional analysis carefully; "this feels like a Business Court case" isn't the standard. Lesson 4, Texas honors freedom of contract. The Preston Hollow Capital v. Truist decision (First Division, December 19, 2025) addressed whether a punitive damages waiver in trust documents between sophisticated parties, a senior care provider and Truist Bank, was enforceable despite Texas Trust Code Sections 111.0035 and 114.007. The First Division held: yes, it is. The Court's reasoning: the Trust Code does not reflect a legislative intent to bar punitive damage waivers in agreements between sophisticated parties. The waiver applied to claims arising out of the trust indenture and security agreement. The terminated trustee continued to owe limited fiduciary duties, specifically, protection of confidential information, even after replacement, but those continuing duties did not override the contractually agreed punitive damages limitation. The structural lesson runs through Texas commercial law generally and is amplified in the Business Court's emerging body of authority: when sophisticated parties allocate risk and remedies in writing, Texas courts honor those allocations. Punitive damages waivers, jury waivers, exclusive-forum clauses, indemnification provisions, limitation-of-liability terms, these aren't second-order considerations to be dismissed when something goes wrong. They're the deal. The Business Court reads them that way. Lesson 5, Specialized commercial review applies at trial, not just at the pleading stage. In Quintero v. Urban Infraconstruction (First Division, February 2026), the Texas Business Court's first jury trial in Dallas reached an unusual conclusion. The plaintiff rested on the second day of trial. The defense immediately moved for a directed verdict. Approximately thirty minutes later, the Court granted it. The Court's analysis focused on the damages evidence. Even setting aside disputes over whether the parties had a written or oral agreement, the Court found "the most glaringly significant" deficiency in the plaintiff's case was the absence of evidence supporting any damages recovery. The directed verdict followed. The structural lesson: specialized commercial judicial review extends through trial. The willingness of a Business Court judge to direct a verdict on damages-evidence sufficiency, and to do it within thirty minutes of a defense motion, reflects the same analytical mode the Court applies in pleading-stage rulings. Cases that lack substantive support don't ride on procedural inertia. The Court will end them. What it means for a Granbury or DFW-area business For closely held Texas businesses sitting in the Eighth Division's catchment area, the practical implications of two years of Business Court operations are real and concrete. Forum-selection clauses in commercial contracts are now a meaningful drafting question. Pre-2024, Texas commercial contracts didn't typically address forum because the answer was the regular district courts. Post-HB 19 and especially post-HB 40, forum is a choice. Including a clause directing qualifying disputes to the Business Court, and specifying the Eighth Division for businesses in this corridor, produces predictability about who will hear a future dispute. The clause is straightforward to draft. Most existing commercial contracts don't have it. Shareholder agreements and governance documents matter more. The Court has subject-matter jurisdiction over derivative actions, fiduciary duty disputes, and TBOC-based actions involving publicly traded corporations regardless of dollar threshold. For privately held companies, the SB 29 opt-in to the codified business judgment rule becomes more meaningful when the disputes that test it will be heard by specialized commercial judges. The combination of clear governance documents, SB 29 opt-in, and Business Court forum-selection is a stack, each layer reinforces the others. Documenting board decisions to qualify for specialized review. SB 29 requires directors and officers to act "on an informed basis" to qualify for the codified business judgment rule presumption. The Business Court is increasingly the forum where that "informed basis" will be evaluated. Contemporaneous records that establish what the board considered, when, and why, agendas, materials, minutes, and the supporting documentation, are how directors claim the protection in litigation. Building that discipline into the meeting cadence is the actual work. For businesses considering relocation to Texas , the Business Court is part of the package. The competitive picture is no longer just no-state-income-tax and SB 29 governance. It's specialized commercial judicial review with published opinions, predictable outcomes, and a developing body of Texas business-law authority. Several recent high-profile relocations to Texas, Tesla being the most-cited, have happened against this backdrop. For businesses already in the Eighth Division catchment area, the practical move is to revisit current contracts and governance documents with a Business Court overlay. Most don't have one. That's an upgrade opportunity that costs little and matters when something eventually goes wrong. The constitutional challenge, worth watching Brown v. Exxon Mobil Corporation , currently pending before the Texas Business Court, contains the first preliminary motion challenging the Court's constitutional structure. The plaintiff, a former senior Exxon executive whose employment terminated in 2025 after twenty-nine years, has alleged that the Texas Business Court's appointment-rather-than-election framework violates both the Texas and U.S. Constitutions. The argument is novel but not frivolous. Texas judges generally are elected; the Business Court's judges are appointed by the Governor and confirmed by the Senate. The constitutional question is whether that appointment structure, combined with the Court's specialized subject-matter jurisdiction, produces a system that meets state and federal due-process and equal-protection standards. The case is in early procedural posture. No ruling has been issued. The constitutional challenge will likely move through the Court itself, then to the Fifteenth Court of Appeals, and potentially to the Texas Supreme Court before resolution. If it succeeds, the entire framework changes, possibly requiring legislative revision to make Business Court judges elected positions, or requiring restructuring of the jurisdictional categories. If it fails, the Court's framework is constitutionally validated and the framework becomes harder to challenge in future cases. Worth watching, both because the structural question is important and because the timing of any resolution will likely affect the next round of legislative tweaks. What to do now Two years into the Texas Business Court, the practical actions for businesses in the Eighth Division catchment area are concrete. For new commercial contracts: include a forum-selection clause directing qualifying disputes to the Texas Business Court, with the Eighth Division as the specified division for matters arising in north-central Texas. The clause is straightforward to draft. The cost is minimal. The benefit is predictability about who will hear a future dispute. For existing governance documents: revisit shareholder agreements, company agreements, and bylaws. Add or sharpen forum-selection language. Consider whether the SB 29 opt-in to the codified business judgment rule is worth pursuing (for most Texas-domiciled corporations, it is). Confirm that decision-making procedures in the documents align with the documentation discipline SB 29 requires. For board practice: build the contemporaneous documentation discipline into the meeting cadence. Agenda design, materials review, minute-keeping, contemporaneous records of the basis for major decisions. The Business Court's emerging authority is making clear that the protection of the codified BJR is real but conditional, and the conditions are documentation conditions. For businesses contemplating Texas relocation: factor the Business Court into the analysis alongside the no-state-income-tax and SB 29 considerations. The specialized commercial forum is now a substantive part of why Texas has become competitive with Delaware as a jurisdiction for closely held and growth-stage businesses. For businesses with a current dispute or a dispute on the horizon: evaluate whether the Business Court is a more appropriate forum. The HB 40 threshold reduction to $5 million has substantially expanded eligibility. The published-opinion practice means counsel has more authority to work with. The bench's commercial backgrounds mean a different quality of analysis. The rules in this article are accurate as of the date of publication, but the Texas Business Court continues to evolve, through new HB 40 implementation rules, through Supreme Court rulemaking on jurisdictional procedures, through accumulating decided cases, and through the constitutional challenge currently pending. This article is general information, not legal advice for any specific situation. About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn Engagement Texas-licensed corporate counsel for businesses in the Eighth Division's catchment area. The corridor running west and south from Fort Worth — Hood, Tarrant, Johnson, Somervell, Erath, and Parker counties — falls within the Eighth Division's jurisdiction. Corporate disputes, governance matters, and business litigation in these counties now route through a specialized court with its own procedural expectations. Effective representation in the Texas Business Courts requires counsel who understands both the substantive law and the court's evolving procedural norms. That combination of corporate transactional knowledge and Business Court litigation awareness is central to this practice. One call starts the conversation. Schedule a Call Going deeper Questions I hear from Texas business owners and counsel about the Business Court and what it means for their operations. What is the Texas Business Court? The Texas Business Court is a statewide specialized trial court created by House Bill 19 in 2023 (88th Legislature) and codified at Texas Government Code Chapter 25A. It opened on September 1, 2024. The court has eleven geographic divisions (five currently operational), each staffed by two judges with at least ten years of commercial litigation, business transaction, or judicial experience. Judges are appointed by the Governor and confirmed by the Senate. The court has subject-matter jurisdiction over commercial disputes meeting specific dollar thresholds and subject-matter categories, including governance disputes, derivative actions, breach of contract claims above the qualified-transaction threshold, intellectual property and trade secret disputes, and matters involving publicly traded companies. Appeals route to the Fifteenth Court of Appeals. Does my company qualify for the Business Court? Likely qualification depends on three factors. First, the type of dispute: the court's subject-matter jurisdiction includes governance disputes, derivative actions, fiduciary duty claims, breach of contract claims arising from "qualified transactions," intellectual property disputes (post-HB 40), trade secret claims, and arbitration-related matters. Second, the dollar threshold: most categories require at least $5 million in controversy as of September 1, 2025 (down from $10 million pre-HB 40). Publicly traded companies qualify regardless of dollar amount. Third, the timing: the case must have commenced after September 1, 2024, earlier-filed cases cannot be removed. For closely held mid-market Texas businesses, the post-HB 40 threshold reduction has substantially broadened eligibility. A $6 million breach-of-contract dispute that wouldn't have qualified under the original threshold is now eligible. How is the Eighth Division different from the others? The Eighth Division sits in Fort Worth and covers eighteen counties of north-central Texas, Tarrant, Parker, Hood, Erath, Johnson, Somervell, Wise, Palo Pinto, Stephens, Eastland, Comanche, Hamilton, Bosque, Hill, Ellis, Navarro, Limestone, and Freestone Counties. It's the third-busiest division by case volume after Houston (Eleventh) and Dallas (First). The two Eighth Division judges have substantial commercial litigation backgrounds, a combined 60+ years of complex commercial work before joining the bench. For closely held businesses in north-central Texas, the Eighth Division is the practical forum of choice when Business Court eligibility applies. Can I include a Business Court forum-selection clause in my contracts? Yes. Texas Government Code Chapter 25A authorizes contractual forum-selection clauses directing qualifying disputes to the Business Court. The clause is straightforward to draft and can specify a particular division (such as the Eighth Division for businesses in north-central Texas). Including the clause produces predictability about who will hear future disputes and signals to counterparties that disputes will be resolved with the specialized commercial review the Business Court provides. Most existing Texas commercial contracts don't include such a clause because the option didn't exist until late 2024. Newer contracts increasingly include them. What's the constitutional challenge to the Texas Business Court? In Brown v. Exxon Mobil Corporation , currently pending in the Business Court, the plaintiff has filed a preliminary motion arguing that the court's appointment-rather-than-election structure violates state and federal constitutional provisions. Texas judges generally are elected; Business Court judges are appointed by the Governor and confirmed by the Senate. The constitutional question is whether that structure, combined with the court's specialized subject-matter jurisdiction, meets state and federal due-process and equal-protection requirements. The case is in early procedural posture; resolution will likely move through the Business Court, the Fifteenth Court of Appeals, and potentially the Texas Supreme Court. If the challenge succeeds, the framework changes substantially. If it fails, the framework is constitutionally validated. Should I incorporate in Texas to get Business Court access? Business Court access doesn't require Texas incorporation. The court has jurisdiction over disputes meeting its subject-matter and threshold requirements regardless of where the parties are incorporated. That said, Texas incorporation does interact with the Business Court framework in important ways, the court has jurisdiction over TBOC-based actions involving Texas corporations, SB 29's codification of the business judgment rule at TBOC §21.419 affects how directors of Texas corporations are evaluated, and the practical experience of Texas-domiciled businesses with the Business Court is increasingly influencing whether new businesses choose Texas as their state of incorporation. The Texas vs Delaware analysis is fact-specific. For founder-controlled mid-market Texas businesses, Texas is increasingly the right answer. How long does a Business Court case typically take? Most Business Court cases resolve within twelve months from filing to disposition, though complex matters take longer. The court's specialized docket, written-opinion practice, and active case management contribute to faster resolution than typical regional district court timelines for comparable disputes. Bench trials average roughly four days; jury trials are still rare but the first jury trial began February 2026 in the Eleventh Division. For business owners contemplating litigation timing, the Business Court generally offers faster resolution than the regular district courts on comparable matters. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Foreign Entity Choice of Law / Choice of Forum Registered Agent Asset Purchase Stock Purchase Due Diligence Indemnification (M&A) Escrow For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Cross-Border Transactions, engagement details Explore Raising Capital in Texas: SAFEs, Notes, and What Investors Want Read Selling Your Business in Texas Read If your business is sitting in the Eighth Division's catchment area, the upgrade opportunities are concrete. Fifteen minutes is enough to determine whether the Texas Business Court matters for your business right now and what practical upgrades make sense. Schedule a Call (682) 529-7177 This article describes the Texas Business Court's operations and decided cases as of the publication date. The court's jurisdictional rules, subject-matter scope, and procedural practices continue to evolve through legislative action (HB 40 effective September 1, 2025), Texas Supreme Court rulemaking on jurisdictional determination, accumulating decided cases, and the constitutional challenge currently pending in Brown v. Exxon Mobil Corporation . The cases discussed are matters of public record from published opinions; counsel evaluating whether the Business Court is appropriate for a specific dispute should consult primary sources and qualified counsel. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## The Texas Data Privacy Act, One Year In: Enforcement Reality and What Compliance Looks Like URL: https://kraus.law/insights/texas-data-privacy-one-year-in/ Data Privacy · TDPSA · Compliance May 11, 2026 8 min read The Texas Data Privacy Act, one year in. What twelve months of enforcement told us, and what mid-market companies are still getting wrong. By Charles R. Kraus Partner, Scale LLP Practice areas this article covers Texas Business Law Corporate Governance If you read nothing else The Texas Data Privacy and Security Act took effect July 1, 2024. For six months, AG enforcement looked like a quiet acclimation program, notice-and-cure letters for discrete failures. That changed on January 13, 2025, when AG Paxton filed suit against Allstate and Arity in Montgomery County District Court, the first enforcement action under any comprehensive state data privacy law in the United States. The Allstate complaint targeted geolocation data collected from 45+ million Americans via an SDK embedded in third-party mobile apps. The lawsuit was the AG telling the market that the cure period is a checkpoint, not a permanent off-ramp. For Texas businesses now: the small business exemption is narrower than most companies believe (it cross-references SBA NAICS standards, varies by industry, and never applies to the sale of sensitive personal data). Privacy policies that don't match operational practice are the dominant enforcement risk. Compliance is no longer about what the policy says. Call us: (682) 529-7177 → When the Texas Data Privacy and Security Act took effect on July 1, 2024, two predictions were widely made about what would happen next. The first was that the Attorney General's office would take an aggressive enforcement posture. Texas had positioned the TDPSA as one of the strongest state privacy regimes in the country, and loud rhetoric usually previews loud enforcement. The second prediction was that most covered businesses would treat compliance as a paperwork exercise. Update the privacy policy. Add a cookie banner. Designate someone. Move on. A year in, the first prediction was wrong. The second was right. The Allstate lawsuit filed on January 13, 2025 is what happens at the intersection, and it is the practical lesson of the law's first year. The first year of enforcement looked nothing like the rhetoric For most of the period from July 2024 through early 2025, AG enforcement under TDPSA looked closer to a quiet acclimation program than to an aggressive crackdown. Letters went out. Companies were given a notice-and-cure window to address discrete failures, most commonly a privacy policy missing a required disclosure, or a consumer rights request that had not been honored within the statutory window. The TDPSA gives the AG a thirty-day cure period before action can be brought. The first year of practice suggested the office was using that period not as a procedural formality but as the center of its enforcement strategy. Companies fixed things. The matters closed. No litigation. The Allstate matter changed the picture. On November 29, 2024, the AG issued Allstate a cure letter under the TDPSA's notice-and-cure provision. Six weeks later, on January 13, 2025, AG Ken Paxton filed suit in Montgomery County District Court against Allstate Corporation and its subsidiary Arity. The complaint alleged that Allstate had paid mobile app developers, including GasBuddy, to install an Allstate-developed software development kit into their applications, allowing Allstate to collect precise geolocation and movement data from more than 45 million Americans, which Allstate then sold to insurance carriers without obtaining the affirmative consent the TDPSA requires. The matter was the first enforcement action under any comprehensive state data privacy law in the United States. That framing matters. The AG was not merely testing TDPSA. The AG was establishing a national precedent for what state-level privacy enforcement will look like. For counsel watching closely, the signal was specific. The AG was prepared to move past acclimation and use the law's enforcement mechanisms to test what privacy compliance looks like in practice, not just what it claims to look like on paper. That is the gap the second year of TDPSA is going to litigate. The small business exemption is narrower than most companies think The TDPSA includes a small business exemption that excuses certain entities from the law's substantive obligations. The exemption is real. It is also narrower than most mid-market companies seem to believe. The statutory text cross-references the federal definition of "small business" under the Small Business Administration's NAICS size standards. The right answer depends on the company's NAICS code, not a single revenue or headcount number. SBA thresholds vary widely by sector, from headcount caps in manufacturing to revenue caps in services. The ranges span $1 million to $40 million+ in revenue, or 100 to 1,500+ employees, depending on industry. The mid-market trap looks like this. A company with $40 million in revenue, 150 employees, and significant consumer data collection, a SaaS firm, a regional financial services business, a healthcare-adjacent vendor, does not look intuitively like a "small business" to the people running it. The CEO assumes the exemption does not apply. The privacy policy gets drafted. The vendor management program gets built. Under SBA NAICS standards, that same company may qualify as small for its specific industry code. The reverse trap is worse. A company that assumes it qualifies for the exemption based on intuition rather than its actual NAICS-based threshold may be operating under the wrong legal framework entirely. When the AG inquiry letter arrives, the exemption claim has to be documented. If it doesn't hold, the underlying compliance gaps are the real exposure. One critical point: the small business exemption does not apply to the sale of sensitive personal data. Section 541.107 of the Texas Business & Commerce Code specifically maintains the prohibition on selling sensitive personal data without consumer consent, even for businesses that otherwise qualify as small under SBA standards. Sensitive data is defined broadly, and includes precise geolocation , biometric data, health information, racial or ethnic origin, religious beliefs, and data from known minors. For any business whose digital operations touch any of those categories, which includes most consumer-facing technology businesses, the exemption is effectively narrower in practice than in headline summary. The SBA's affiliation rules add another wrinkle. A standalone analysis of one entity's size is wrong if the entity has affiliates. Private-equity portfolio companies, for example, count all portfolio company sizes together for SBA threshold purposes. The analysis has to capture the full affiliation web. The takeaway: every covered business in Texas should have a documented exemption analysis. Whether the answer is "we qualify" or "we don't," the analysis should be in writing, dated, and held by general counsel or the privacy officer. "TDPSA theater" and the consent management gap The first-year failure mode that defines enforcement risk is the one Chuck and Brian Elliott named on Episode 12 of the Y'all Street Law Podcast: TDPSA theater. A company publishes a privacy policy that lists, in detail, the rights of Texas consumers and the company's data practices. Behind the policy, the actual operational machinery does not match. Three common patterns: The privacy policy promises consumers a right to access their data. The actual data infrastructure cannot produce a coherent inventory of what is held about a specific consumer across the company's systems. A request comes in. The privacy team scrambles. Twenty-eight days later, the response is partial. The privacy policy describes the company's consent management practices. The actual consent management user flow on the website serves a cookie banner that nobody reads, defaults every category to "on," and stores the consent record nowhere it could be reproduced if challenged. The policy and the practice describe different companies. The privacy policy declares that the company does not sell personal information. The actual ad-tech integration on the site, Google Analytics, Meta Pixel, third-party retargeting, meets the TDPSA's broad definition of " sale " or "share" under most reasonable readings. The disclosure is wrong. Each of these patterns is fixable. None of them is fixed by a privacy policy rewrite. They are fixed by aligning the company's actual operational practice with what its policy claims it does. The AG inquiries the first year produced suggest this alignment work is where second-year enforcement will focus. What to do now For any Texas business that handles consumer data and is not a confirmed-exempt small business under the NAICS standards, the practical compliance reset is short. Audit the privacy policy against actual data practice. Walk through every commitment in the policy and confirm it matches what the business does. Where there is a gap, fix the practice or amend the policy. Both choices are legitimate. The unacceptable answer is leaving the gap in place. Test the consumer rights response process end-to-end. Submit a synthetic request. Run it through the actual workflow. Time it. Document it. If the company cannot honor an access request within the statutory window using its real systems, the policy commitment is unreliable. Test the consent management flow. Open the site in an incognito browser. Walk through what a consumer experiences. Are the choices clear? Are the defaults defensible? Is the consent record stored and retrievable? If a consumer disputes a consent decision a year from now, can the company produce the record? Document the exemption analysis if claiming one. If the company is operating under the small business exemption, the analysis supporting that claim should be in writing, with the specific NAICS code, the applicable SBA threshold, and the company's metric at the time of analysis. Update it annually. Name the privacy contact and make sure the inquiry pipeline works. The AG sends letters. They go to general counsel addresses, registered agent addresses, or whatever the AG can find. If the company does not have a clear internal owner for those letters and a tested process for responding, the thirty-day cure clock starts before anyone in the company realizes a letter has arrived. None of this is exotic compliance work. It is the difference between a compliance posture that survives an AG inquiry and one that does not. Engagement Texas-licensed corporate counsel for businesses navigating TDPSA compliance. Privacy regulation now sits at the intersection of corporate governance, vendor management, marketing operations, and product engineering. The companies that handle TDPSA compliance well treat it as a board-level program rather than a privacy-officer task. That framing produces materially better outcomes when an AG inquiry letter arrives. My practice covers the governance side, board-level privacy program design, vendor agreement diligence, response readiness for AG inquiries, and the documentation discipline that turns a compliance posture into a defensible record. The technical privacy implementation runs through trusted specialists; the legal and governance overlay runs through me. The first conversation is fifteen minutes. It identifies whether the situation needs structural attention now or whether existing measures are sufficient. Schedule a Call Going deeper on this topic? Brian Elliott and I covered the TDPSA's first year, the Allstate matter, and the small business exemption mechanics on the Y'all Street Law Podcast, Episode 12: Texas Data Privacy Turns One . Going deeper. Questions I hear from Texas business owners and counsel on this topic. When did the TDPSA take effect? The Texas Data Privacy and Security Act (TDPSA), passed as HB 4 and signed into law by Governor Abbott on June 18, 2023, took effect on July 1, 2024. The universal opt-out mechanism, requiring covered businesses to honor browser-based opt-out signals like Global Privacy Control, became effective on January 1, 2025. What did the Allstate lawsuit involve? On January 13, 2025, the Texas Attorney General filed suit against Allstate Corporation and its subsidiary Arity in Montgomery County District Court, the first enforcement action under any comprehensive state data privacy law in the United States. The complaint alleged that Allstate paid mobile app developers (including GasBuddy) to install an Allstate-developed software development kit, which collected precise geolocation and movement data from more than 45 million Americans nationwide. Allstate then sold that data to insurance carriers without obtaining the affirmative consent the TDPSA requires. The cure letter preceding the suit was issued November 29, 2024. Does the small business exemption apply to my company? The TDPSA cross-references the U.S. Small Business Administration's definition of "small business," which varies by NAICS industry code. Thresholds range from $1 million to over $40 million in revenue, or from 100 to 1,500+ employees, depending on industry. The right answer depends on your specific NAICS code, not a single revenue or headcount figure. The SBA's affiliation rules also apply, if your company has corporate affiliates, their size counts toward the threshold. A documented exemption analysis specific to your NAICS code is the only reliable way to determine whether the exemption applies. What happens if my company sells sensitive personal data? The small business exemption does not extend to the sale of sensitive personal data. Section 541.107 of the Texas Business and Commerce Code requires all businesses, including those otherwise qualifying as small under SBA standards, to obtain consumer consent before selling sensitive personal data. The TDPSA defines sensitive data broadly to include precise geolocation, biometric data, health information, racial or ethnic origin, religious beliefs, sexual orientation, citizenship status, genetic data, and data from known minors. How long does the cure period last under the TDPSA? The TDPSA provides a 30-day cure period from the date the Attorney General issues a notice of alleged violation. During this window, a covered business may correct the alleged violation without facing enforcement action or civil penalties. Civil penalties can reach up to $7,500 per violation if the cure period passes without resolution. The cure period is permanent, it has no sunset date, making it similar to Utah's privacy-law approach. What does the universal opt-out requirement mean? Since January 1, 2025, the TDPSA has required covered businesses to recognize and honor universal opt-out mechanisms, browser or device signals such as Global Privacy Control (GPC) that communicate a user's opt-out preference for data sales, targeted advertising, and certain forms of profiling. The signal must be honored automatically; the business cannot require a user to opt out separately for each purpose. Companies whose consent management platforms do not detect and honor GPC signals are out of compliance regardless of their privacy policy disclosures. What civil penalties can the AG seek under the TDPSA? The Texas Attorney General has the exclusive authority to enforce the TDPSA. There is no private right of action. The AG can seek civil penalties of up to $7,500 per violation, in addition to injunctive relief. Penalties accumulate per violation, which in cases involving large data sets, like the Allstate matter, which alleges violations affecting more than 45 million Americans, can produce substantial aggregate exposure even at the per-violation cap. What should our board be doing now? For boards of covered Texas businesses, the practical sequence is: (1) confirm whether the small business exemption applies via a documented NAICS-based analysis; (2) audit the published privacy policy against actual data practices and reconcile any gaps; (3) test the consumer rights response process end-to-end on a synthetic request; (4) confirm that the consent management platform recognizes GPC signals; (5) designate a named privacy contact with authority and confirm the AG inquiry pipeline works; (6) document the program in board minutes so the compliance posture is defensible if challenged. Defined terms. The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. TDPSA Controller Processor Sensitive Data Consent Sale of Personal Information Cure Period NAICS Code Affiliation Rules Universal Opt-Out View the complete Texas Business Law Glossary → Related reading. Insights Data Breach Response: What Texas Counsel Should Do First Practice Corporate Governance Podcast Episode 12: Texas Data Privacy Turns One If your business handles consumer data, the documentation discipline matters. Fifteen minutes is enough to identify whether your TDPSA posture would survive an AG inquiry, and what to fix if it would not. Schedule a Call (682) 529-7177 This article is general information based on publicly available sources as of the publication date and is not legal advice for any specific situation. Outcomes depend significantly on the specific facts, entity structure, and timing involved. IRS guidance, regulatory positions, and case law continue to develop. Consult qualified legal counsel before making decisions that affect your specific situation. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn --- ## Texas Redomestication: The Quiet Migration from Delaware URL: https://kraus.law/insights/texas-redomestication-from-delaware/ Corporate Governance · Redomestication · DExit May 11, 2026 11 min read Texas redomestication: the quiet migration from Delaware. Why companies are moving, and why the framework you use to think about the question is more important than the headline numbers. By Charles R. Kraus Partner, Scale LLP Practice areas this article covers Corporate Governance Texas Business Law Cross-Border Transactions If you read nothing else When Tesla redomesticated from Delaware to Texas in June 2024, it was framed as the opening act of a corporate exodus. DExit became shorthand. Two years later, eleven additional public companies have left Delaware. Coinbase announced its move in November 2025. ExxonMobil's board recommended a Texas reincorporation on March 10, 2026, a move from New Jersey, not Delaware, and a meaningful signal because Exxon was not fleeing anything. The Delaware Supreme Court reversed the Court of Chancery's rescission of Elon Musk's compensation plan on December 19, 2025, restoring the original package. The Tornetta narrative that originally motivated Tesla's exit was, formally, no longer the law. The trend continued anyway. For boards considering the question now, the issue is not whether to follow the herd. It is whether the underlying calculus, independent of any one Delaware decision, argues for redomestication in their specific case. The honest answer in most boardrooms is sometimes yes, often no, and the analysis is more nuanced than the headlines suggest. Call us: (682) 529-7177 → When Tesla's stockholders voted in June 2024 to redomesticate from Delaware to Texas, the move was widely framed as the opening act of a corporate exodus. DExit became a recognized shorthand. Commentary on both sides of the bar predicted a wave. Texas had just opened the Texas Business Court. Senate Bill 29 was working its way through the legislature. Delaware looked, for the first time in fifty years, structurally vulnerable. In the two years since, the picture has filled in. By March 2026, eleven additional public companies had reincorporated out of Delaware in the period following Tesla's move. Coinbase joined the migration in November 2025. ExxonMobil's board recommended a Texas reincorporation on March 10, 2026, a move out of New Jersey, where the company had been incorporated since 1882, and a meaningful signal because Exxon was not fleeing anything. The largest publicly traded U.S. oil company chose Texas on the merits. The Delaware Supreme Court reversed the Court of Chancery's rescission of Elon Musk's compensation plan on December 19, 2025, restoring the original package. The Tornetta narrative that had originally motivated Tesla's exit was, formally, no longer the law. The redomestication trend continued anyway. For boards now considering the question, the practical issue is not whether to follow the herd. It is whether the underlying calculus, independent of any one Delaware decision, argues for redomestication in their specific case. The honest answer in most boardrooms is sometimes yes, often no, and the analysis is more nuanced than the headlines suggest . What changed Three separate developments together drove the redomestication conversation, and they should be evaluated separately. The Tornetta sequence In January 2024, the Delaware Court of Chancery rescinded Tesla's $56 billion equity compensation package for Elon Musk on the basis that the plan failed entire fairness review. Tesla responded by redomesticating to Texas and re-submitting the plan to its stockholders for ratification. The Chancery refused to revise its rescission in December 2024 and awarded plaintiff's counsel a $345 million fee, a Delaware record. The case became a public symbol of perceived Delaware overreach. Then, on December 19, 2025, the Delaware Supreme Court reversed. The reversal matters. The headline "Delaware court rescinded the largest comp package in history" is no longer accurate. But it matters less than the underlying signal that Tornetta sent during the two years it was the law. Boards saw a Delaware Chancery decision rescinding a stockholder-ratified compensation plan, watched a long appeal, and concluded that the predictability premium they paid for Delaware incorporation was not what they thought it was. That conclusion has not been unwound just because the Supreme Court eventually disagreed with the Chancery. The Delaware response In early 2025, the Delaware General Corporation Law was amended to provide a statutory safe harbor for controlling stockholder transactions. The amendment was a direct response to Tornetta and the loss of corporations to Texas and Nevada that followed. It is, by all reports, a meaningful improvement to Delaware's position. Delaware is not standing still. Texas Senate Bill 29 Signed May 14, 2025, immediately effective, SB 29 codified the business judgment rule , authorized a three-percent ownership threshold for derivative actions (capped at three percent of outstanding shares), permitted prospective jury trial waivers for internal entity claims, narrowed shareholder books-and-records inspection rights, and gave LLCs and limited partnerships substantially more flexibility to define fiduciary duties . The first federal court decision applying SB 29, Gusinsky v. Reynolds , upheld a Southwest Airlines bylaw imposing the three-percent threshold and dismissed the plaintiff's derivative action with prejudice. Take those three developments together and the practical question for a board is no longer "Should we follow Tesla out of Delaware?" It is "Given that both Delaware and Texas have substantially modernized their corporate law in the past eighteen months, which framework fits our entity and our shareholder profile?" That question has different answers for different companies. Three patterns in the actual moves The companies that have redomesticated to Texas fall into three identifiable patterns. Boards considering the move should be honest about which pattern they fit. Push-driven moves Tesla is the prototype. The company was a Delaware corporation with a specific Delaware-court exposure, and the redomestication was a defensive response to that exposure. The transition was technically clean but procedurally contentious, Tornetta's plaintiff filed emergency motions seeking to block the move. Push-driven moves carry public scrutiny, shareholder litigation risk during the transition itself, and the persistent perception (whether accurate or not) that the change of domicile was self-interested. The Tesla pattern is appropriate for a small subset of companies: those with controlling-stockholder structures, those with bespoke compensation or governance arrangements that face significant entire-fairness exposure in Delaware, and those for whom the public optics of the move are an acceptable cost. Pull-driven moves ExxonMobil is the prototype here. Exxon was not in Delaware. It was in New Jersey. There was no specific litigation pulling it out. The board's recommendation cited Texas's modernized business statutes and the Texas Business Court infrastructure as the reasons for the change. The proxy materials accompanying the recommendation explicitly disavowed the controversial SB 29 opt-in provisions, Exxon is not adopting the three-percent derivative threshold or the new shareholder-proposal restrictions, and it is representing to shareholders that the move will not weaken shareholder rights. Pull-driven moves are likely to be the dominant pattern over the next several years. They lack the litigation drama of push-driven moves, they do not invite the same shareholder backlash, and they reflect a more durable analysis: which state's legal infrastructure best fits the company's operations, governance posture, and shareholder expectations on a five-to-ten-year horizon. Hybrid moves ArcBest is an instructive example. ArcBest reincorporated in Texas but expressly opted out of the most controversial SB 29 provisions, the three-percent derivative threshold and the SB 1057 shareholder proposal restrictions, in its new Texas charter. The proxy described those provisions as "inconsistent with shareholder value and preferences." The company took the package of Texas law it wanted (business judgment rule, books-and-records limitations, jury waiver authority, Texas Business Court access) and declined the package it did not want. The hybrid pattern is, for many boards, the right answer. SB 29 is not all-or-nothing. The provisions are individually electable, and a thoughtful board can adopt the protections that strengthen its position without adopting the provisions that would invite shareholder opposition or proxy advisor downgrade. The actual reasons companies are moving Strip away the Tornetta narrative and the DExit branding, and the reasons companies are choosing Texas reduce to a small number of structural factors. Procedural infrastructure. The Texas Business Court has been operational since September 2024. It is now accumulating a body of written opinions on Texas business law, opinions that, by statute, will be written and published, in contrast to the historical norm of Texas trial courts. The Court is staffed with appointed specialized judges. Cases move on a structured timeline. For corporations whose litigation profile is heavily commercial, the Business Court is a substantive procedural upgrade over generalist district courts. Predictability of corporate law. SB 29 codifies what was previously common-law doctrine and adds new statutory protections. Statutory codification has tradeoffs, common-law doctrines evolve as courts apply them; statutory provisions require legislative action to amend, but for many boards, the certainty of knowing the rule by reading the statute is preferable to the certainty of knowing the rule by tracing fifty years of Chancery decisions. No state income tax. This applies to individuals, not corporations directly, but it matters at the margins. Founders, executives, and key employees benefit from a Texas presence. For companies with significant Texas-based workforces, redomestication is a complementary signal. Tax and regulatory alignment. For companies with significant Texas operations, having the entity's state of incorporation match its operational center has procedural benefits, service of process, venue, regulatory familiarity, that compound over time. Forum selection clauses to the Business Court. SB 29's authorization of forum selection clauses for internal entity claims, paired with the Texas Business Court, creates a procedurally aligned framework for governance disputes: specialized judge, no jury (via Section 2.115 waiver), written opinions feeding into the developing Texas business law jurisprudence. None of these reasons reduce to "because Delaware is hostile." Each is a structural advantage that a board can evaluate on its own merits. Does the Tornetta reversal change the calculus? The honest answer is: not as much as the reversal's prominence suggests. The Delaware Supreme Court's decision to restore Musk's compensation package addresses one specific case. It does not retroactively change the perception of Delaware that boards built over the two years the Chancery decision was the law. It does not unwind the Texas legal reforms that those moves precipitated. It does not make Delaware's franchise tax cheaper, its court calendar shorter, or its plaintiff's bar less active. What the reversal does change is the headline narrative. "Delaware courts will rescind even stockholder-ratified compensation packages" is no longer an accurate generalization. Boards who delayed redomestication decisions specifically because of Tornetta exposure may now want to reconsider whether that specific concern still motivates the move. But for the majority of boards considering Texas, the reversal does not move the needle. The Texas Business Court did not get less attractive. SB 29 did not become less protective. The cost-of-being-incorporated-in-Delaware analysis did not change. The reversal is one data point in a longer pattern, not a fundamental reorientation. What boards should evaluate The framework for evaluating a redomestication decision has five components. First, the specific litigation profile. Is the entity facing, or likely to face, derivative litigation in Delaware that would benefit from a different procedural and substantive framework? If yes, the analysis is straightforward and the move is generally warranted. If no, the analysis turns on the next four components. Second, the controlling-stockholder structure. Companies with controlling stockholders bear specific entire-fairness exposure in Delaware that Texas law treats differently. The Delaware DGCL amendments enacted in 2025 narrowed but did not eliminate this exposure. For controlled companies, Texas remains structurally more favorable. Third, the shareholder base. What will institutional shareholders think? What will proxy advisors recommend? The opt-in provisions of SB 29, particularly the three-percent derivative threshold and the SB 1057 shareholder-proposal restrictions, are flashpoints. A board can adopt the SB 29 package wholesale (Tesla, Southwest) or opt out of the controversial pieces (ArcBest, ExxonMobil's apparent approach). The right answer depends on the shareholder base and the company's appetite for governance-related friction. Fourth, the operational fit. Where are the workforce, the executives, the operational center? A move that aligns the entity's state of incorporation with its operational center has compounding procedural benefits over years. Fifth, the transition cost. Redomestication is not free. The proxy process, the legal fees, the disclosure exposure during the transition window, and the time required from senior management are real. For a company without a specific reason to move, those costs may not be justified, even if Texas is, on the merits, the better long-term answer. This is the framework Chuck uses when a board calls. The redomestication question is rarely "should we move?" It is "here are the five things to evaluate; tell me about each, and the answer will become clear." Engagement Texas-licensed corporate counsel for boards evaluating redomestication. Redomestication is a long conversation. The decision affects governance posture, shareholder dynamics, litigation exposure, and operational fit for the next ten years. The wrong move, out of Delaware when the actual issue was upstream of Delaware, or into Texas with opt-in provisions that don't fit the shareholder base, creates more friction than it resolves. My practice covers the analysis, the board-level conversations, and the actual transactional work of moving entities between jurisdictions. Cross-border transactions and U.S./Canadian dual-domicile structures are part of the same conversation when they fit. The first conversation is fifteen minutes. It identifies whether redomestication is the right answer to the question the board is asking, and if it is, what the optimal structure looks like. Schedule a Call Going deeper on this topic? Brian Elliott and I have discussed Texas redomestication, the Tornetta sequence, and SB 29 across several episodes of the Y'all Street Law Podcast, Episode 1 , Episode 4 , Episode 11 , and Episode 16 . Together they provide running commentary on how the Texas corporate-law environment has developed since the September 2024 launch of the Business Court. Going deeper. Questions I hear from Texas business owners and counsel on this topic. What is DExit? "DExit" is shorthand for the movement of corporations away from Delaware as a state of incorporation. The term came into common usage following Tesla's June 2024 vote to redomesticate from Delaware to Texas in the wake of the Tornetta v. Musk decision. In the two years since Tesla's move, eleven additional public companies have reincorporated out of Delaware, with destinations including Texas, Nevada, and (in ExxonMobil's case) Texas via New Jersey. Did the Tornetta v. Musk reversal stop the trend? No. The Delaware Supreme Court reversed the Court of Chancery's rescission of Elon Musk's $56 billion Tesla compensation package on December 19, 2025, restoring the original plan. The headline narrative that drove early redomestication conversations is no longer accurate as a statement of Delaware law. But the structural factors that motivated the trend, concerns about predictability, Delaware's franchise tax, plaintiff's-bar activity, and the relative attractiveness of new Texas infrastructure, remain in place. ExxonMobil's March 2026 redomestication announcement followed the reversal by nearly three months. What's the difference between push-driven and pull-driven redomestication? Push-driven redomestication is a defensive response to specific exposure in the current jurisdiction. Tesla is the prototype, its move was a direct response to the Tornetta decision. These moves carry transition-period litigation risk and the perception of self-interested motivation. Pull-driven redomestication is attraction-based: the company is not fleeing anything but choosing a different jurisdiction on the merits. ExxonMobil moving from New Jersey to Texas is the prototype. Pull-driven moves typically face less shareholder opposition and reflect more durable analysis. What is the hybrid redomestication pattern? A hybrid redomestication takes the package of Texas law a board wants, the codified business judgment rule, the Texas Business Court access, the books-and-records limitations, the jury waiver authority, while expressly opting out of the most controversial SB 29 provisions, such as the three-percent derivative threshold or the SB 1057 shareholder-proposal restrictions. ArcBest is an example: it reincorporated in Texas but included charter language affirmatively opting out of the restrictive provisions. The hybrid pattern is often the right answer when a board wants Texas's infrastructure but is concerned about shareholder or proxy-advisor reaction to the opt-in provisions. How many companies have left Delaware for Texas? In the period following Tesla's June 2024 redomestication, Delaware experienced a net loss of eleven public companies through reincorporation. The most prominent moves include Tesla (June 2024), Coinbase (November 2025), and ExxonMobil (March 2026, pending shareholder approval at the May 27, 2026 annual meeting). Several mid-cap companies have also moved, including Southwest Airlines, Dillard's, CenterPoint Energy, HeartSciences, Legacy Housing Corporation, and ArcBest. The actual market-cap impact of these moves is substantial, roughly $3 trillion in market capitalization has moved away from Delaware in the period since Tornetta. Does Texas have any disadvantages compared to Delaware? Yes. Delaware has roughly fifty years of accumulated Chancery Court precedent that addresses fact patterns Texas courts have not yet seen. Texas case law on key corporate doctrines is developing rapidly but is still thin compared to Delaware's. Sophisticated transactional parties accustomed to the Delaware framework may find specific Texas provisions less familiar. Some institutional investors and proxy advisors remain skeptical of the SB 29 opt-in provisions and may downgrade companies that adopt them. For companies without a specific reason to move, these tradeoffs may argue for staying put. What role does the Texas Business Court play? The Texas Business Court became operational on September 1, 2024 under House Bill 19, with jurisdictional thresholds adjusted by House Bill 40 effective September 1, 2025. The Court is staffed with specialized judges appointed for two-year terms, hears commercial disputes meeting jurisdictional thresholds, and is statutorily required to issue written opinions. The combination of specialized judges and written opinions is what positions the Court to develop Texas business law into a body comparable to Delaware Chancery precedent over time. For redomesticating companies, the Court is the procedural infrastructure that makes the SB 29 jury waiver and forum selection clauses meaningful. What should our board evaluate before deciding? Five components: (1) the specific litigation profile, is the entity facing or likely to face derivative litigation in Delaware that would benefit from a different framework; (2) the controlling-stockholder structure, controlled companies bear specific entire-fairness exposure in Delaware that Texas treats differently; (3) the shareholder base, what will institutional shareholders and proxy advisors think of SB 29 opt-in provisions; (4) the operational fit, does the entity's state of incorporation align with its operational center; (5) the transition cost, the proxy process, legal fees, and management time required. The right answer is fact-specific. Boards considering the question should walk through each component with counsel before committing. Defined terms. The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Redomestication DExit Entire Fairness Business Judgment Rule Derivative Action Controlling Shareholder Texas Business Court DGCL TBOC Forum Selection Fiduciary Duty View the complete Texas Business Law Glossary → Related reading. Insights SB 29: What Texas Boards Need in Their Governance Documents Practice Corporate Governance Insights Texas Business Court: 26 Months of Decided Cases Podcast Episode 11: Texas Corporate Law Overhaul Before the proxy filing, the framework matters more than the headline. Fifteen minutes is enough to identify whether redomestication is the right answer to the question your board is asking, and if it is, what the optimal structure looks like. Schedule a Call (682) 529-7177 This article is general information based on publicly available sources as of the publication date and is not legal advice for any specific situation. Outcomes depend significantly on the specific facts, entity structure, and timing involved. IRS guidance, regulatory positions, and case law continue to develop. Consult qualified legal counsel before making decisions that affect your specific situation. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn --- ## Your Business Partner Wants Out. Now What? URL: https://kraus.law/insights/your-business-partner-wants-out/ Litigation + Corporate April 7, 2026 8 min read Your business partner wants out. Now what? The five ways a Texas partnership dissolution can go, and what to do in the first 72 hours to protect your business, your money, and the relationship if it can be saved. By Charles R. Kraus Partner, Scale LLP If you read nothing else Your partner just told you they want out. You have 72 hours before the decisions you make start limiting your options. First: do not send the email you're composing in your head, anything you write now is discoverable later. Second: confirm your access to the company's financial records, bank accounts, and key contracts. Third: call an attorney who has handled this before. Not next week. Today. The difference between a $30,000 negotiated buyout and a $200,000 lawsuit is almost always determined by what happens in the first three days. Call us: (682) 529-7177 Most business owners react emotionally. They make promises they can't keep, send messages they can't unsend, or freeze and do nothing while their partner makes moves. All three responses are wrong, and all three happen because the business owner doesn't know what they're facing. So let me lay it out. There are five paths a partnership dissolution can take in Texas, and the one you end up on depends on two things: what's in your operating agreement, and how the two of you behave in the first few weeks. The five paths 1 The negotiated buyout Both sides agree on a price, a payment structure, and a transition plan. The departing partner sells their interest to the remaining partner (or back to the company). You draft a separation agreement, transfer the interest, update your governing documents, and move on. Total legal fees: $15,000–$40,000 for both sides. Timeline: 60–90 days. This is the outcome you want, and the one you're most likely to get if both sides have competent counsel early. 2 The buy-sell agreement triggers If your operating agreement includes a buy-sell provision, and if it was drafted well, the departure triggers a predetermined process: a valuation mechanism, a purchase price formula, a payment timeline, and transfer procedures. You follow the document. The only question is whether the valuation is current. If the buy-sell was written ten years ago with a fixed price, it probably doesn't reflect today's value. But even an imperfect buy-sell is better than no buy-sell, because it provides a framework both sides agreed to when the relationship was still good. 3 Dissociation without dissolution Under the Texas Business Organizations Code , a partner can dissociate, separate from the partnership, without forcing the business to dissolve. The remaining partner continues the business, and the departing partner is entitled to the fair value of their interest. This is the TBOC's default for partnerships without a buy-sell provision. The challenge: "fair value" is rarely something both sides agree on. You'll likely need a business valuation, and the methodology will be the first thing you fight about. Earnings-based? Asset-based? Market comparables? Each produces a different number, sometimes dramatically different. 4 Judicial dissolution When the partners are deadlocked, the relationship has broken down, or it's no longer "reasonably practicable" to carry on the business (TBOC §11.314), either partner can petition a Texas court to dissolve the company. The court appoints a receiver, the business is wound down or sold, and the proceeds are distributed. This is the nuclear option, and it's expensive, slow, and destructive to business value. But for some partners, it's the only leverage they have. Courts don't grant dissolution lightly, but the threat of it changes the negotiation dynamics significantly. 5 Fiduciary duty litigation This is what happens when the dissolution goes wrong. One partner diverts business, self-deals, competes with the company, withholds financial information, or takes actions designed to squeeze the other partner out. Texas courts take fiduciary duty violations seriously, especially since SB 29 codified the business judgment rule in 2025, which clarified what protects directors and what exposes them. Fiduciary duty claims can convert a $50,000 buyout into a $500,000 lawsuit. This is the most expensive path, and it's almost always preventable if both sides have counsel from the beginning. What determines which path you're on Three factors. The first is your operating agreement. If it has a well-drafted buy-sell provision with a clear valuation mechanism, you're probably on Path 1 or 2. If it's silent on buyouts, or if you don't have an operating agreement at all, you're headed for Path 3 or 4 by default. The second factor is the relationship. If both partners can still be in the same room, speak respectfully, and acknowledge that the other person has legitimate interests, you can negotiate. If the relationship has deteriorated to the point where every communication is adversarial, you're closer to Path 4 or 5. The third factor, and the one most people overlook, is behavior. What you do in the first two weeks after the conversation sets the trajectory for everything that follows. I've seen partners who were headed for Path 1 end up on Path 5 because one of them did something impulsive that breached their fiduciary duties. I've also seen partners who seemed destined for litigation find their way to a negotiated resolution because both sides got competent counsel early and the attorneys kept the temperature down. The difference between Path 1 and Path 5 is rarely about the law. It's about behavior. What to do right now If your partner has told you they want out, or if you're the one who wants to leave, here's what I tell every client in your position: In the first 24 hours Do not communicate in writing. No emails, no texts, no Slack messages. Anything you write is discoverable in litigation. If you need to respond, say "I hear you, let's talk about this in person this week", and nothing more. Secure your access. Confirm that you can still log into every bank account, accounting system, CRM, and file storage system the business uses. Don't take anything. Don't change any passwords. Just verify that you can see what you need to see. If your partner has sole access to the financials, that becomes a problem very quickly. Locate your governing documents. Find the operating agreement, the original formation documents, any amendments, any buy-sell agreement, any side letters. Read them tonight. Look specifically for: buyout provisions, valuation mechanisms, dispute resolution clauses, and any restrictions on transfer. In the first week Call an attorney. Not your family lawyer, not your real estate closer, an attorney who has handled partnership dissolutions in Texas. The first conversation should tell you which of the five paths you're on and what your realistic options look like. This call typically takes 30 minutes and will save you months of uncertainty. Do not negotiate terms. I know this is counterintuitive. Your instinct is to sit down with your partner and work out a deal. But until you understand your legal position, what the operating agreement requires, what your partner is entitled to, what the business is worth, and what your rights are if the negotiation fails, you cannot negotiate effectively. The worst time to learn that you gave away too much is after you've already shaken hands. In the first 30 days Get a business valuation. Whether you're buying or selling, you need to know what the business is worth. This isn't a back-of-the-napkin exercise, it's a formal valuation by a certified appraiser who understands Texas law. The valuation will be the foundation of every conversation that follows, so invest in getting it right. Engage in structured negotiation. With counsel on both sides and a valuation in hand, you can have a productive conversation about terms. The discussion should cover: purchase price, payment structure (lump sum vs. installment), transition timeline, restrictive covenants (non-compete, non-solicit), customer and employee communications, and any ongoing obligations (guarantees, leases, loans). About the author Charles R. Kraus Corporate attorney with 25 years of practice and three tours as General Counsel of public companies, including DIRTT Environmental Solutions (TSX: DRT) and two Calgary-based dual-listed energy companies. Currently Outside General Counsel and Corporate Secretary to Greenfire Resources (NYSE/TSX: GFR). Founder of Kraus Law PLLC in Granbury, Texas, and Partner at Scale LLP. Full bio → Schedule a call → LinkedIn How I help Partnership transitions are structural problems that require structural solutions. Buy-sell agreements, partnership buyout negotiations, and ownership transitions require counsel who understands both the corporate mechanics and the business dynamics. The strategic decisions — valuation methodology, payment structure, transition timeline, restrictive covenants — are made before any filing, and getting them right determines whether the separation is clean or contested. When dissolution moves to litigation, Scale LLP's team handles it. The business strategy stays coordinated through one counsel relationship. One call starts the process. Schedule a Call Going deeper Questions I hear from business owners in this situation. What should I do in the first 72 hours after my partner says they want out? Three things, in this order. First, do not send the email you're composing in your head, anything you write now is discoverable later. Second, secure your access to the company's financial records, bank accounts, and key contracts, not to take them, but to ensure you can still see them. Third, call an attorney who has handled partnership dissolutions before. The first conversation will tell you which of the five paths you're on, and that changes everything about what you do next. What happens if we don't have a buy-sell agreement? Without a buy-sell agreement, you're governed by the default provisions of the Texas Business Organizations Code. For partnerships, this means either partner can dissociate, but dissociation doesn't automatically mean dissolution. The remaining partner may continue the business, but they'll owe the departing partner the fair value of their interest. Without an agreement that defines "fair value," you'll likely disagree about what the business is worth, and that disagreement often becomes litigation. If you don't have a buy-sell agreement, the single best thing you can do right now is get one drafted before the relationship deteriorates further. How are partnership interests valued when a partner leaves? If your buy-sell agreement specifies a valuation method, that method controls, whether it's a formula, a fixed price, an agreed-upon appraiser, or a process for selecting one. If there's no agreement or no valuation method, the TBOC requires payment of the "fair value" of the departing partner's interest. Fair value typically means the value of the interest as a going concern, not a liquidation value. In practice, this usually requires a formal business valuation, and the two sides will almost certainly disagree about the appropriate methodology. Having a valuation mechanism in your operating agreement before a dispute arises eliminates the single most expensive variable in a partnership dissolution. Can my partner force a sale or dissolution of the company? It depends on your entity type and governing documents. In a Texas LLC, a member can petition a court for judicial dissolution under TBOC §11.314 if it's "not reasonably practicable to carry on the entity's business in conformity with its governing documents." Courts have interpreted this to mean situations where the members are deadlocked, the company's purpose can no longer be achieved, or the relationship has deteriorated to the point where the business can't function. A partner can't simply force a sale because they want out, but they can create enough legal and operational pressure to make dissolution the practical outcome if the remaining partner doesn't offer a reasonable buyout. What are the fiduciary duties between business partners in Texas? In Texas, partners owe each other fiduciary duties of loyalty and care. The duty of loyalty means you can't compete with the partnership, divert business opportunities, or engage in self-dealing transactions without disclosure and consent. The duty of care means you must act with the care an ordinarily prudent person in a similar position would exercise. These duties don't end the moment one partner announces they want to leave, they continue until the dissolution is complete. Violations during a dissolution can convert what would have been a $50,000 buyout negotiation into a $500,000 lawsuit. Should I try to negotiate before involving an attorney? You should absolutely talk to your partner, but talk to an attorney first. Not because you need to be adversarial, but because you need to understand your legal position before you negotiate. Most business owners make commitments in the first conversation that limit their options later. "Let's just split everything 50/50" sounds reasonable until you realize the business has $200,000 in receivables, a lease obligation, pending contracts, and equipment that one partner uses daily. An attorney who has handled these situations will help you understand what a fair resolution looks like before you start negotiating one. What does a partnership dissolution typically cost? The range is enormous, and it depends almost entirely on whether the partners can agree on terms. A negotiated buyout with competent counsel on both sides typically runs $15,000 to $40,000 in total legal fees. A litigated dissolution, with discovery, depositions, valuation disputes, and possibly a trial, can exceed $200,000 per side and take 18 to 24 months. The single biggest determinant of cost is how early the partners engage counsel. The earlier both sides have competent legal advice, the more likely the resolution stays in the negotiated range. Defined terms The legal terminology in this article. Each term has a precise statutory or doctrinal definition in the Kraus Law glossary, with citations and Texas-specific application notes. Business Divorce Charging Order Judicial Dissolution Shareholder Oppression Derivative Action Company Agreement Member Manager Membership Interest Distribution For the complete reference, see the Texas Business Law Glossary — over 100 entries with primary-source citations and recent-development tracking. Related reading Texas Business Law Explore Business Litigation at Scale LLP Explore Corporate Governance & Board Advisory Explore The sooner you call, the more options you have. Partnership dissolutions get simpler when both sides have counsel early. One call to Chuck starts the process. Schedule a Call (682) 529-7177 This article provides general information about Texas partnership law and is not legal advice for your specific situation. Every partnership dissolution involves unique facts, governing documents, and circumstances. If you're facing a partnership dispute, consult an attorney licensed in your jurisdiction before taking action. Chuck Kraus is licensed in Texas, Minnesota, and Alberta . --- ## Intellectual Property Attorney | Patents, Trademarks & IP URL: https://kraus.law/intellectual-property/ Scale LLP Network Your intellectual property deserves serious counsel. Patents, trademarks, trade secrets, and licensing aren't side projects, they're core business assets. When you need IP counsel that understands both the law and the business strategy behind it, one call to Chuck connects you with Scale LLP's IP practice. What Scale's IP practice handles Patent Prosecution & Licensing Utility and design patent applications, prosecution, portfolio management, and licensing agreements that protect your innovations. Trademark Protection Federal and state trademark registration, enforcement, opposition proceedings, and brand protection strategy. Trade Secret Strategy Identification, documentation, and protection of confidential business information, including employee agreements, NDAs, and enforcement. IP Portfolio Management Strategic assessment of your full intellectual property portfolio, patents , marks, copyrights , and trade secrets , with a focus on business value. IP Litigation Support When IP disputes arise, Scale's IP attorneys work alongside the litigation team to protect your rights in court or arbitration. The team behind this practice Scale LLP's intellectual property practice was significantly strengthened by the acquisition of Creedon PLLC, a recognized Texas IP boutique. The founder of Creedon PLLC, a Reisman Award winner, now serves as Scale's Deputy Managing Partner for Impact Initiatives. This isn't a generalist adding IP to their list. This is a dedicated IP practice with deep Texas roots, operating inside a national firm. How I connect you Intellectual property isn't my practice area, but it affects nearly every business I work with. Whether you're forming a company, negotiating a deal, or planning an exit, IP is part of the equation. When a client needs IP counsel, I bring in a colleague from Scale's IP team. They have the technical depth to handle the work. I have the business context to make sure it fits your broader strategy. One firm, one relationship. Where the technical work lives IP work has four distinct sub-practices, each with its own technical depth: Patents. Application drafting, prosecution before USPTO, freedom-to-operate analysis, infringement opinions, post-grant proceedings (IPRs, PGRs), and the patent landscape research that determines whether a technology has clear runway. Patent prosecution requires patent bar admission; not all IP attorneys carry it. Trademarks. Federal registration (USPTO), state registration where strategic, common-law rights development, trademark prosecution, opposition and cancellation proceedings before the TTAB, and the international expansion work (Madrid Protocol filings, national applications) that protects brands across markets. Trademark work also covers domain disputes (UDRP, ACPA) and online enforcement. Trade secrets. Identification, documentation, employee and contractor agreements, security protocols, and the Defend Trade Secrets Act (DTSA) and Texas Uniform Trade Secrets Act (TUTSA) protections that exist when trade secret status is properly maintained. Most trade secret disputes turn on whether the information was treated as secret. Licensing and IP transactions. Outbound and inbound licenses, technology transfer agreements, the IP carve-out provisions in M&A, joint development agreements, and the schedule structure that determines who owns derivative work product. License terms that look standard often have material economic consequences when commercialization scales. When clients call us IP counsel typically gets engaged at four moments: Before product launch. Freedom-to-operate analysis, clearance searches, patent landscape review, and the strategic decision about whether to pursue defensive patents, offensive patents, or trade secret protection. Pre-launch is when the cheapest and most effective protections exist. At brand creation or expansion. Trademark search and clearance, registration filings, and the global protection strategy for brands that will scale across jurisdictions. The cost of trademark registration is trivial compared to the cost of a rebrand. At commercialization. License negotiations, either side, for technology, content, or branded products. The terms negotiated at first commercialization compound through every subsequent deal in that licensing line. When infringement surfaces. Cease-and-desist letters received or sent, infringement assertions, defensive responses to patent assertions, and the strategic decisions about licensing, litigation, or design-around. The first response shapes the trajectory. What engagements cost Patent and trademark prosecution work is largely flat-fee. USPTO filing, office action response, and registration maintenance all have predictable scope. Scale LLP IP partners typically price 30-40% below Am Law 100 rates for comparable work. Patent prosecution for a typical mid-complexity utility patent runs in a defined range, with office action response priced separately. Trademark registration for a single mark in a single class runs flat-fee plus USPTO fees. Patent and trademark litigation runs hourly with phased budgets, IPR proceedings before the PTAB are scoped differently than district court infringement litigation, which is scoped differently than ITC Section 337 investigations. Licensing work pricing depends on complexity: standard outbound license templates can run flat-fee; novel cross-license negotiations or complex joint development agreements run hourly. Royalty audit work and license enforcement run hourly. USPTO and PTO fees, foreign filing costs, translation expenses, and registrar fees pass through with engagement-letter transparency. How this fits with the rest of the work IP work intersects with my primary practice in three specific places: Cross-border IP strategy. U.S./Canada parallel filings, PCT entries, Madrid Protocol coordination, and the strategic question of which jurisdictions justify the cost of pursuing rights. For Canadian companies entering the U.S. market or U.S. companies expanding into Canada, the IP layer is often where the most cost-effective protection decisions get made. IP as transaction asset. In M&A , technology licensing transactions, and capital raises, IP is frequently the most valuable asset. IP due diligence, schedules, representations, and indemnification provisions all require both transaction lawyering and IP lawyering. The disconnect between those skill sets is where deals slow down. IP governance and ownership. Inventor assignment agreements, work-for-hire structures, contractor IP provisions, the IP-related sections of board resolutions, and the documentation that establishes clean chain of title. IP that isn't owned cleanly can't be licensed, transferred, or used as collateral. The IP partner does the IP work. I make sure it fits the rest of the business. Common questions How does Chuck connect me with IP counsel? You call me, I understand your situation, and I introduce you to the right Scale IP attorney. I brief them on your business context before the call, so you don't start from zero. Do I need a patent attorney specifically, or can any IP attorney help? It depends on the matter. Patent prosecution requires a patent bar admission, Scale has attorneys with that credential. For trademarks, trade secrets, and licensing, any qualified IP attorney can help. I'll make sure you're connected with the right specialist. What if I'm not sure whether my issue is an IP issue? That's one of the best reasons to call. Many business owners don't realize that a contract dispute is really a trade secret issue, or that a branding question is really a trademark question. I help sort that out before connecting you with the right attorney. Can Chuck handle the business side while Scale handles the IP side? That's exactly how it works for most of my clients. I handle corporate, governance, and transactional work while the IP team handles patents, trademarks, and licensing. One firm, two practice areas, no coordination problems. Further reading from the desk. Articles and analysis I've written on topics adjacent to this practice area. IP Fundamentals Patents, Trademarks, Trade Secrets How the four kinds of IP differ, and which protections matter for your business. Read · 11 min Licensing Licensing Your IP in Texas Royalty structures, territory carve-outs, and the deal terms that move the needle. Read · 9 min Cross-Border Cross-Border Transactions What U.S./Canada deals require, written by an attorney licensed in both jurisdictions. Read · 12 min Your ideas are worth protecting properly. One call to Chuck. He'll connect you with the right IP attorney at Scale LLP. Schedule a Call (682) 529-7177 --- ## Business Litigation Attorney | DFW & Granbury URL: https://kraus.law/litigation/ Scale LLP Network Commercial litigation in DFW, run through one relationship. One call to Chuck connects you with Scale LLP's litigation practice. Commercial disputes don't wait for convenient timing. When litigation arises, you need an attorney who's done this, and you need them fast. What Scale's litigation practice handles Commercial Disputes Contract claims, partnership disagreements, business torts, and complex commercial litigation across state and federal courts. White-Collar Defense Government investigations, regulatory enforcement actions, SEC inquiries, and criminal defense for business professionals. Internal Investigations Board-directed investigations into potential fraud, misconduct, compliance failures, and whistleblower allegations. Shareholder & Partnership Disputes Minority oppression claims, fiduciary duty breaches, derivative actions , and buyout disagreements. Arbitration & Mediation Alternative dispute resolution, arbitration and mediation , for commercial matters where confidentiality and speed matter more than precedent. The team behind this practice Scale LLP's litigation practice is led by attorneys who have served at the highest levels of government and private practice. The team includes a former federal prosecutor from the Jack Smith investigation, the kind of experience that changes the dynamic in any dispute. Scale has been recognized by Legal 500 in its U.S. Elite Rankings. How I connect you Litigation isn't my focus, but it's something my clients need regularly. Commercial disputes, investigations, contract claims, these come up in the normal course of business. When they do, I don't send you to a stranger. I bring in a colleague from Scale's litigation team who I know and who operates under the same firm, the same standards, and the same commitment to getting it right. I stay involved to make sure the transition is smooth and the relationship stays whole. Where the technical work lives Commercial litigation in Texas operates across three forums: federal court (Northern, Eastern, Western, Southern Districts), Texas state court (district courts in 254 counties), and the Texas Business Court, operational since September 2024 and currently building case law in its eighth division for north-central Texas. The substantive work covers: Contract disputes. Breach claims, anticipatory breach, material breach analysis, and the remedies that flow from each. The strategic question is usually "what do we want, performance, damages, or termination?" before the procedural one. Business divorces. Partner disputes, minority owner claims under the Texas Business Organizations Code, buyout valuation disputes, and the dissolution proceedings that follow when negotiated exits fail. Fraud and breach of fiduciary duty. Common law fraud, statutory fraud claims under the Texas Business and Commerce Code, breach of fiduciary duty by partners, managers, or officers, and the heightened pleading and proof standards each carries. White-collar and investigations. Internal investigations, government inquiries (SEC, FINRA, DOJ), and the response posture decisions that determine cooperation credit, voluntary disclosure considerations, and parallel proceedings risk. The Texas Business Court's emerging case law on these matters, particularly the eighth division's docket, is where the substantive landscape is moving fastest. When clients call us Four scenarios drive most litigation engagements: The demand letter arrives. A formal demand or threat-of-suit letter triggers a 30-day decision window. Response posture, settlement consideration, document preservation, and pre-litigation positioning all get set in that window. The suit is filed. Response deadlines (21 days in federal court, often less in state court for certain claims) force fast strategic decisions: removal, motion to dismiss, transfer, answer, and the procedural posture that shapes the case. Before suing. Pre-suit demand, jurisdictional analysis, forum selection, and the question of whether to file at all. Most disputes that get filed settle; the negotiating leverage is often higher pre-suit. Internal investigation triggers. A whistleblower complaint, an audit finding, a regulatory inquiry, or a board concern that requires independent investigation. The choice of investigator, scope, and reporting structure determines the privilege posture. What engagements cost Litigation is the least predictable practice area for pricing. Most matters run hourly with budgets developed against the procedural posture, pleading phase, discovery phase, summary judgment phase, trial preparation, trial. Scale LLP's litigation partners typically bill 30-40% below Am Law 100 rates in Dallas or Houston. Phase budgets are scoped at the outset of each phase; budget revision triggers are built into engagement letters. Some matters work on alternative fee arrangements: flat fees for specific phases (motion to dismiss, summary judgment), contingency or partial-contingency for plaintiff-side commercial claims where the matter and economics fit. The firm does not take consumer plaintiff work, mass torts, or personal injury. The variable cost of litigation is discovery. e-Discovery vendors, expert witnesses, deposition costs, and document review, these often exceed attorney fees in mid-size commercial disputes. Engagement letters address them explicitly. How this fits with the rest of the work Litigation work intersects with my primary practice in three specific places: Governance disputes. Board fights, director removal, shareholder activism, and minority owner claims arise out of governance failures, and the litigation lives at the intersection of corporate documents (what the bylaws permit) and statutory law (what the BOC requires). My governance work feeds the litigation strategy. Transaction litigation. Earnout disputes, indemnification claims, working capital adjustments, MAC clause invocations, most M&A litigation is contract litigation over the deal documents I help draft. Understanding the deal context shortens the litigation learning curve materially. Cross-border disputes. When the litigation involves U.S. and Canadian parties, jurisdictions, or assets, the dual-qualified perspective on forum selection, judgment enforcement, and parallel proceedings is where the strategic decisions get made. The litigation partner runs the case. I run the integration with everything else. Common questions How does the referral process work? You call me. I learn about your situation, identify the right Scale litigation attorney for your matter, and make a direct introduction. I stay involved as your primary relationship, you're not being handed off, you're being reinforced. Will I have to explain my situation all over again? No. I brief the Scale attorney before the introduction. They come into the conversation already understanding your business, your history with me, and the basics of the matter. You pick up where we left off, not from scratch. What does this cost me? My introduction costs you nothing. The Scale attorney will scope the engagement and provide fee estimates directly. Their rates are competitive with peer firms, and you avoid the search cost and uncertainty of finding litigation counsel on your own. Can Chuck still be involved in my case? Absolutely. For most clients, I continue to serve as the primary relationship and strategic counsel while the litigation team handles the dispute. Many business disputes have corporate governance, contractual, or transactional dimensions that fall squarely in my practice area. What if my dispute involves another state? Scale LLP has 80+ attorneys licensed across 22 states. For litigation in jurisdictions outside Texas, I connect you with the Scale attorney who practices in that state. One firm, one relationship, regardless of where the dispute lands. Further reading from the desk. Articles and analysis I've written on topics adjacent to this practice area. Texas Business Court TX Business Court at 26 Months Five decided cases and what specialized commercial judicial review looks like. Read · 14 min Litigation Strategy The CEO's Guide to Getting Sued What to do in the first 48 hours when your business gets sued. Read · 10 min Contract Disputes Contract Disputes in Texas How Texas courts read commercial agreements, and where deals fail. Read · 11 min Disputes don't get simpler with time. One call to Chuck. He'll connect you with the right litigation attorney at Scale LLP, today. Schedule a Call (682) 529-7177 --- ## Mergers & Acquisitions for Texas Business Owners URL: https://kraus.law/mergers-acquisitions/ Mergers & Acquisitions For most owners, selling the company is the largest transaction of their life — and the only one they'll ever run. I represent owners through the sale, purchase, or transition of privately held companies. Some are ready to exit. Some are years out and want to be ready when the moment comes. A few are on the buy side, acquiring rather than selling. The common thread is that the stakes are concentrated into a single event, and the owner deserves counsel whose only interest is theirs. Start a conversation → You built the business over years. The sale happens once, often inside a few months, against a buyer who has done this many times before. The asymmetry is the problem. My work is to stand on your side of it. What I do Sell-side representation. Buy-side representation. The exit and succession planning that comes before either. Across all of it, the job is the same: protect the owner's position, hold the structure of the deal, and keep the transaction from being run on the buyer's terms. I am your counsel, not your broker. A broker runs the sale process and earns a commission when it closes. On larger deals that work is worth the fee. My obligation is different. It runs only to you, including the obligation to tell you when a deal is wrong, when the price does not reflect the company, or when the right move is to wait. A sale touches corporate, tax, real estate , employment , and IP at the same time. I handle the corporate and governance core — deal structure, the purchase agreement, board authorization, the cap table, IP ownership — and bring in the specialists from Scale LLP when the deal reaches into the rest. If you want the full picture of how a sale unfolds, I've written the owner's roadmap : all six phases, from decision to close. Where most owners lose ground Two places, almost always. The first is preparation. Owners who wait until a buyer appears negotiate from whatever shape the business happens to be in that quarter. Owners who understand their value early have time to fix what depresses it — customer concentration, owner dependence, thin records — before it costs them at the table. The second is the gap between what a business is worth today and what it could be worth at sale. Those are different numbers. The distance between them is where the real money in an exit is made or left behind. Closing it is planning work, and it takes longer than most owners expect. A quick readiness scorecard will tell you where you stand. How the work begins: understanding value Before any transaction conversation is useful, you need an honest read on what the company is worth — and you can get one yourself, free, in about ten minutes. The starting point is a complimentary valuation , run on the same engine professional advisors and institutions rely on. It produces four distinct figures — what the assets would sell for, what the equity is worth, the enterprise value, and the floor in a forced sale — plus operating measures benchmarked against your industry. Completing it costs you nothing. I review every valuation personally and walk you through what it means — because the figure is the easy part, and the work is in what you do about it. A word on what it is and is not. This is an indication of value, not a certified appraisal . It is the right tool for planning, for understanding your position, and for deciding whether and when to move. It is not a formal appraisal for tax filing or litigation. When you need that, I will tell you, and arrange it. The valuation answers what. The conversation that follows answers what to do about it — and that is the work that decides how a transition turns out. Get your business valuation → Who this is for Owners of established, privately held companies who are within sight of a transition — a sale, a purchase, a handoff to the next generation — and want it handled by someone whose loyalty is not divided. If you are early in building and a transition is years away, you likely do not need me yet. Start with the value estimate, watch the numbers, and reach out when the picture sharpens. I would rather point you to the right first step than sell you an engagement you do not need. Why Kraus Law I'm a corporate attorney with 25 years of practice and three tours as General Counsel of public companies — including DIRTT Environmental Solutions (TSX: DRT), where I ran legal through the company's pandemic reset, and today as outside General Counsel to Greenfire Resources (NYSE/TSX: GFR). I've sat on the inside of a company sale, building the data room and negotiating the purchase agreement while the CEO kept running the business. I've also been the first call from an owner who just received an unsolicited letter of intent and didn't know whether to be flattered or suspicious. I've been on both sides of this table. I'm a partner at Scale LLP, a national firm of 80-plus attorneys across 22 states. For you that means one thing: you will not outgrow this relationship. Whatever the deal needs — real estate, employment, IP, tax — there's a specialist inside the firm, and I'm the one who makes the introduction. You get boardroom-level counsel from Granbury, without the Dallas or Houston hourly rate. I don't publish results with dollar signs and exclamation points. The kinds of transactions I've handled, and what clients say about working with me, are on the results page . Frequently asked questions I just got an unsolicited offer for my company. Should I be flattered or suspicious? Both, in that order. Someone wrote a letter of intent, so the business is worth pursuing. That part is real. The suspicious part is the timing. An unsolicited offer usually arrives when the buyer believes they can get the company for less than it's worth: before you've prepared, before you have your own read on value, while you're the least ready to negotiate. This is often the first call I get from an owner. My answer doesn't change. Don't respond to the number yet. Get your own valuation first, so the conversation starts from what the company is worth instead of what the buyer hoped to pay. I'm already working with a business broker. Do I also need an M&A attorney? Usually yes, because the two roles don't answer to the same interest. A broker runs the sale process and earns a commission when the deal closes. On a larger deal that work is worth the fee. But a broker gets paid when it closes, so the incentive points at closing. Mine doesn't. I'm your counsel, not your broker, and my obligation runs only to you. That includes telling you when the deal is wrong, when the price doesn't reflect the company, or when the right move is to wait. The broker finds the buyer and drives toward a close. I hold the structure of the deal and protect your position inside it. On most sales you want both. When should I bring in a lawyer, when a buyer shows up or before? Before, if you have the choice. Owners lose ground in the same place again and again: they wait until a buyer appears, then negotiate from whatever shape the business happens to be in that quarter. Customer concentration. Owner dependence. Thin records. A handful of contracts that can't be assigned without someone's consent. None of it is fatal, but each one costs you at the table, and most of it takes months to fix rather than weeks. The work that raises the number is the work you do before the buyer is in the room. Once the letter of intent lands, most of your negotiating room is already gone. Start when a transition is in sight, not when it's already underway. Should the deal be structured as an asset sale or an equity sale? It depends which side you're on, and the two sides usually want opposite things. Buyers lean toward buying assets: they step up the tax basis, take larger depreciation deductions, and leave most of the old liabilities behind. Sellers lean toward selling equity: one clean transfer, capital-gains treatment, and you walk away from the liabilities along with the company. That tension gets negotiated on nearly every deal. Where the target is an S corporation or a corporate subsidiary, there's a bridge worth knowing about, a 338(h)(10) election. It keeps the deal a stock sale legally, so contracts and licenses stay in place, while treating it as an asset sale for federal tax, so the buyer gets the step-up. The catch is that it isn't free to you. The election can convert some of your gain into ordinary income, which means if a buyer asks for it, the price should gross up to put you back where a straight stock sale would have left you. Have that negotiation before it goes into the letter of intent, not after. The buyer wants to hold back part of the price and tie some of it to future performance. How do I protect myself? By treating the headline number and the money you'll actually collect as two different things, because they are. A few structures show up on almost every deal. Part of the price usually sits in escrow for a period after closing, as security if something in your representations turns out to be wrong. The price gets trued up for working capital at close, so the figure moves with the cash and receivables you actually leave in the business. And some buyers propose an earnout, where a slice of the price depends on how the business performs after you've handed over the keys. Escrow and a working-capital adjustment are standard and manageable. Earnouts are where sellers get hurt, because you're betting on results you no longer control, measured by the people who now do. If there's an earnout, the protection lives in the definitions: how performance is measured, who runs the business during the period, what the buyer is and isn't allowed to do that would move the number. Given the choice, I'd rather negotiate a higher figure at close than a bigger one you might never see. What actually derails a deal after the letter of intent is signed? Diligence, almost always. The letter of intent sets a price. Diligence is where the buyer tests whether the business is what the letter assumed. The surprises are what kill deals or reprice them: a major customer on a handshake instead of a contract, revenue that depends on the owner personally, financials that don't survive a close look, key contracts that can't be assigned without consent, an employee or IP problem nobody documented. Each one hands the buyer a reason to retrade the price or walk. The defense is to find them first. When I build the sell side, the diligence file gets assembled and the obvious problems get fixed before the buyer asks, so the surprises that would have cost you are already handled. The deals that close on their original terms tend to be the ones that were ready before they started. Related Understand your value before you need to Valuation Why owners get a valuation Find the reason that fits you → Valuation What is your business actually worth? The three methods, the four numbers → Valuation Indication of value vs. certified appraisal Which one you actually need → Exit Readiness The exit-readiness scorecard Seven questions, an honest read → Where to start If a transition is on your horizon, the earliest useful step is a clear read on what the company is worth. Start there, or start with a call. A 15-minute conversation costs you nothing, and we'll figure out whether this is the right fit. Start a conversation → Get your business valuation --- ## Texas Business Courts Launch: What Boards, Founders, and In-House Counsel Need to Know, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-1-texas-business-courts/ --- ## Future of Law Rapid Fire: Six Partners, One Microphone, San Diego, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-10-future-of-law-rapid-fire/ --- ## Texas Corporate Law Overhaul: SB 29, the Statutory Business Judgment Rule, and the Bifurcated Boardroom, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-11-texas-corporate-law-overhaul/ --- ## Texas Data Privacy One Year In: TDPSA Theater, the Small Business Exemption, and the Allstate Enforcement Action, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-12-texas-data-privacy/ --- ## The Qualified Small Business Stock Boost: Jet Fuel on Fire for Texas Capital Formation | Y'all Street Law Podcast URL: https://kraus.law/podcast/episode-13-qsbs-boost/ Y'all Street Law · Episode 13 The Qualified Small Business Stock Boost: Jet Fuel on Fire for Texas Capital Formation October 28, 2025 17:59 Hosted by Chuck Kraus & Brian Elliott Listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm Chuck Kraus and Brian Elliott unpack the One Big Beautiful Bill Act expansion of Section 1202, tiered exclusions at three and four years, the $15M cap with inflation indexation, the $75M gross asset ceiling, and what this means for Texas capital formation, founder entity decisions, and Canadian-US flips. In this episode Eight chapters, ~18 minutes Why QSBS just got dramatically better What QSBS is and how it's used What changed: tiered exclusions, $15M cap, inflation indexation Texas implications: stacking with no state income tax Action items: entity conversions and timing International dimension: Canadian and UK flips How QSBS compares to the Canadian Lifetime Capital Gain Exemption Practical advice for general counsel “ I think these four letters are the four most important letters in U.S. capital markets. , Chuck Kraus · Opening framing What this episode covers QSBS explained for founders and investors The new tiered holding period structure (50% / 75% / 100%) Increased gain exclusion caps ($10M to $15M, indexed to inflation) Converting from LLC or S-corp to C-corp for QSBS eligibility International dimension: Canadian and UK companies considering US flips How QSBS compares to the Canadian Lifetime Capital Gain Exemption Why this episode matters QSBS is the most powerful federal tax provision available to Texas business owners building toward an exit. The OBBBA changes don’t just expand the tool, they change how founders should think about exit timing, entity structure, and state of residence at the time of sale. For Texas specifically, the absence of state income tax means the federal exclusion is the effective exclusion, putting the state in a uniquely favorable position relative to non-conforming jurisdictions. The international dimension is equally consequential: the QSBS expansion has materially shifted the calculus for Canadian and UK founders considering whether to set up a U.S. holding company structure ahead of their next capital raise. “ Either one of those were a big change. Both of them together are fantastic. , Chuck Kraus · On the combined effect of tiered exclusions plus the increased cap Mentioned in this episode Statutes & legislation Section 1202 of the Internal Revenue Code One Big Beautiful Bill Act (OBBBA) Concepts Qualified Small Business Stock (QSBS) C-corporation S-corporation Limited liability company (LLC) Flow-through entity Original treasury issuance Holding period Series A financing Delaware flip US flip Capital gains exclusion Gross assets test Geographic Texas United States Canada United Kingdom Delaware People & roles Chuck Kraus, host Brian Elliott, host General counsel and CFOs (audience focus) Related reading from the desk Related QSBS After OBBBA: Section 1202 Rewrite for Texas Business Owners The complete written analysis of the changes discussed in this episode. Related Cross-Border US-Canada Transactions Practical guidance on Canadian-to-US flips and cross-border deal mechanics. Related Raising Capital in Texas Series A through later-stage capital formation for Texas founders. Related Delaware to Texas: A 2026 Redomestication Playbook How domicile decisions interact with QSBS positioning. Related Texas Business Law: Formation to Exit The lifecycle context for entity choices that affect QSBS eligibility. “ It dwarfs it incredibly. , Chuck Kraus · Comparing QSBS to the Canadian Lifetime Capital Gain Exemption Related episodes Related Episode 8: Texas Stock Exchange Shakeup The exchange-listing companion to the QSBS capital-formation discussion. Related Episode 11: Texas Corporate Law Overhaul SB 29 governance reform that pairs with Texas's QSBS-favorable tax position. Related Episode 16: 2026 Predictions Where the QSBS discussion fits into broader 2026 capital formation themes. Common questions from this episode What is QSBS and what does it do? QSBS, Qualified Small Business Stock, refers to provisions in Section 1202 of the Internal Revenue Code that exclude federal capital gains tax on the sale of stock in qualifying small business C-corporations. The exclusion is per-issuer rather than per-taxpayer, and applies to original issuance stock held for the required period. What changed under the One Big Beautiful Bill Act? Three changes. First, tiered exclusions: 50 percent gain exclusion at three years held, 75 percent at four years, and the original 100 percent at five years (previously holders received nothing under five years). Second, the per-issuer cap rose from $10 million to $15 million, indexed for inflation starting 2026. Third, eligibility extended to companies with up to $75 million in gross assets, up from the prior $50 million. Does QSBS apply to LLCs and S-corporations? No. QSBS applies only to stock issued by C-corporations from original treasury issuance. Companies organized as LLCs taxed as partnerships, or as S-corporations, would need to convert to C-corp status before issuing the stock that becomes QSBS-eligible. Many companies structured as flow-through entities are now considering that conversion specifically to position for QSBS treatment on a Series A or subsequent capital raise. When does the QSBS holding period start? At the time the stock is originally issued by the C-corporation. The holding period does not relate back to the date of incorporation, and it does not include time the holder owned predecessor entity interests, such as LLC units that were converted to corporate stock. Founders considering the conversion path need to factor this clock into their exit timing. How does the QSBS exclusion stack with state taxes? The federal exclusion eliminates federal capital gains tax. State tax treatment varies. In Texas, where there is no state income tax, the federal exclusion is the effective exclusion, there is no state-level reduction. In states like California and New York, the federal exclusion does not eliminate state-level capital gains tax, so the practical benefit is reduced for residents of those states. Can foreign companies access QSBS through a US flip? Yes. By forming a new U.S. C-corporation and reorganizing the foreign entity as a wholly-owned subsidiary of the new U.S. parent, subsequent U.S. investments can be structured as QSBS-eligible. Existing shareholders who exchange their foreign shares for U.S. stock in the flip itself generally do not receive QSBS treatment, because the exchange is not an original treasury issuance, but post-flip raises by U.S. investors create QSBS-eligible stock. How does QSBS compare to the Canadian Lifetime Capital Gain Exemption? The two operate on different dimensions and shouldn't be directly compared in absolute dollar terms. The Canadian LCGE is a per-taxpayer lifetime cap on capital gains from qualifying dispositions, currently around CAD $1 million indexed. QSBS is a per-issuer cap of $15 million (or 10x basis, whichever is greater) with no lifetime limit on the number of issuers a single taxpayer can claim against. A taxpayer with positions in multiple QSBS-eligible companies can claim the exclusion separately against each. When did the new QSBS rules take effect? The One Big Beautiful Bill Act provisions took effect for stock issued after the bill's signing in summer 2025. Stock issued before that date remains under the prior rules. For founders and investors, this creates an inflection point: stock issued under the old rules has the old terms, stock issued under the new rules has the new terms, and the timing of any conversion or new raise determines which set of rules applies. “ Jet fuel on fire. , Chuck Kraus · On the combination of QSBS plus Texas's no-state-income-tax environment Full transcript Show transcript Conversation between Chuck Kraus and Brian Elliott. Lightly edited from auto-transcription, ad reads removed, paragraphs grouped, speakers attributed where determinable. Listen on Apple Podcasts or Spotify for the original audio. Why QSBS just got dramatically better Chuck So, Brian, welcome back. I think it's episode 13 of Y'all Street Law Podcast. Today, we're going to talk about a pretty significant improvement to capital formation that was included in that One Big Beautiful Bill Act. I think these four letters are the four most important letters in U.S. capital markets. They are QSBS, stands for Qualified Small Business Stock, as you know, and it just got a shot in the arm. Brian Yeah, thanks, Chuck. I think we were all having our barbecues over the summer, and we saw this bill come by, and the real narrative was about deficit spending and taxes. And there was a lot included in the bill that got lost. One of the things is the QSBS rules, and I'd like to get into that. But timing is key. So why don't you give us the start at the top, Chuck, and tell us what changed, what's new, and what should we expect? Chuck Yeah, to set the stage: QSBS is provisions in the tax code, Section 1202, that gives special treatment to exclude from gain stock that is Qualified Small Business Stock. It used to be that you had to hold the stock for no less than five years. If you were four years and 364 days, that was not enough, you had to hold for more than five years. But if you did, you got an exclusion of the greater of 10x your basis or $10 million. Chuck That was great, but this is even better. This now tiers the exclusions. The exclusion starts at three years, and the cap has moved from $10 million to $15 million, and thereafter it's going to be indexed to inflation. Either one of those were a big change. Both of them together are fantastic, and it's already spurring more and more conversations about conversions from other types of entities into C-Corps, which are eligible for this, and spurring conversations about Delaware flips or conversions from foreign entities into U.S. C-Corps. Brian Yeah, I mean, if we could just take a step back, and let's look at it at a broader level: we're talking about exclusions from tax on the sale of stock on an exit, right? So why don't you just walk us through what does QSBS mean for founders and investors, and how is it normally used? What QSBS is and how it's used Chuck Yeah, so normally where this gets exciting is you're raising external capital, you're doing your Series A, B, C, D, whatever, and these investors have the ability, if they hold the stock for the requisite period of time, to exclude from capital gains stock that meets the requirement of qualified small business stock. So they can invest in a startup company, they can fund its growth, then the company exits via M&A or stock sale, and if the stock qualifies as QSBS, that gain is excluded from tax. Very powerful. Brian Excellent. So besides the caps being lifted, did anything else change? Are there any other provisions that we should know about? What changed: tiered exclusions, $15M cap, inflation indexation Chuck Yeah, so let's walk through it. The first big thing, as I mentioned, is it used to be you had to hold no less than five years. Now there are tiered exclusions. Starting at a three-year hold period, there's a 50 percent gain exclusion. If you hold for four years, you get a 75 percent gain exclusion. And if you hold for five years, and this was the old rule, if you hold for five years, you get a 100 percent gain exclusion. So the change is that you now get partial exclusion starting at three years, and a 75 percent exclusion starting at four years. Brian Yeah, and that's up to a certain maximum point, right? A certain cap level. It used to be $10 million? Chuck Yeah. So the second big thing is that there is a per-issuer gain exclusion cap. That cap used to be the greater of $10 million or 10 times your basis. That cap on a per-issuer basis is now increased to the greater of $15 million or 10 times your basis. And then starting in 2026, that cap is indexed for inflation. So the $15 million will rise as inflation rises. Brian Well, that's a pretty significant jump and a good benefit for holders of QSBS stock. Chuck It's enormous, frankly, when you think about the greater of $15 million or 10x your basis, that can be massive amounts of exclusion from capital gains. This applies, of course, nationally; this is in the One Big Beautiful Bill. Brian What are the Texas implications? How does that relate to what we're doing here? Texas implications: stacking with no state income tax Chuck Yeah, this is the federal tax code, so this is an exclusion from federal taxes. But as we think about it in our home state of Texas, you add to that exclusion the fact that Texas has no state income tax. So the QSBS exclusion is incredibly valuable here. I think that, combined with all the other capital formation initiatives in the state of Texas, makes it extremely valuable. Brian So talk to me about who should consider taking action, and what kind of actions should we be thinking about with respect to this rule change? Action items: entity conversions and timing Chuck Yeah. The conversations we started having immediately were with companies that are currently structured as something other than a C-corporation, that is, an entity not taxed as a C-corp. So it's not an LLC that's taxed as a partnership, and it's not an S-corporation. It only applies to entities that have elected C-corp status. So it immediately started to filter into conversations we have with companies about potentially converting from one of those flow-through entities into a C-corporation. Chuck Oftentimes our clients will start as an LLC or as a partnership because they're going to generate significant losses in the first few years, and they don't want those losses to be stuck in the corporation. They want those losses to flow through to the owners. But if you're an entity that's past that, that's nearing the point where you're going to start to generate some taxable earnings and profits, it's a great time to consider flipping to a C-corporation. Chuck The other way it started coming up in conversations is with entities that are about to do their first significant raise, that Series A raise. The principal purpose: having stock that is eligible for QSBS, that is C-corporation stock, is a very attractive, often mandatory thing for outside money coming in. And so in order to set yourself up to go out and raise that money, you want to put yourself in a position to be able to do that conversion, be a C-corporation at the time to issue the stock. Brian And as for new formations, is this something that a new company would consider right away, where normally they would tend to lean toward perhaps an S-corp or LLC? Does this give you more incentive to go to a C-corp right away? Chuck Yeah, potentially. I still think that the timing is more important when you're going to raise that external capital. So if you're a company that is going to shoestring it for the first little while, or you have investors who would prefer to fund the deficits until the company gets to a steady, sustainable state, we deal with lots of companies that start as a flow-through and then convert to a C-corporation once they've got their feet under them and are ready for that first big raise. Brian And the holding period starts at the time of issuance? Chuck Yes. The holding period starts at the time the stock is issued. So you need that three-to-five-year clock to start to run at the time the initial stock is issued. It doesn't go back to the date of incorporation. Brian Good considerations. Let's talk about how this affects international. You've been doing a lot of work with Canadian and UK companies and their considerations when they're looking for a US-domicile company. Tell us how those considerations come into play. International dimension: Canadian and UK flips Chuck Yeah. The last few months, it's been two words in those conversations: tariffs, and now QSBS. I think that all the tariff concerns in the first half of the year were driving lots of foreign companies who wanted to access the US market to just look seriously at taking the leap and setting up a presence in the US, or directly flipping their org structure to put a US entity at the top of the structure. Part of the considerations there were tariffs, setting up a presence here to manufacture or sell directly here. And then the other is this consideration of QSBS and being able to issue stock that would be eligible. Brian When they're looking to make that flip, does the international founder get benefits in this situation? Chuck No. In the conversion, the shareholders that are converting in what is a stock-for-stock transaction do not then get QSBS treatment, because it has to be an original treasury issuance. But if you convert, then any money you subsequently raise in the United States can be structured to be QSBS-eligible to those investors. Brian In the Canadian example, I know you do a lot of work in Canada, Chuck, how does this compare to the Canada Lifetime Capital Gain Exemption? How QSBS compares to the Canadian Lifetime Capital Gain Exemption Chuck It dwarfs it incredibly. The Lifetime Capital Gain Exemption is something around, well, a billion dollars per investor per lifetime is way too generous a description; it's much smaller than that. This QSBS exclusion is $15 million, not per taxpayer, but per issuer, or 10x basis. So it's just monumental. I had some conversations on LinkedIn and then private phone calls where participants in the Canadian capital markets were really pointing out that there's just nothing in Canada that compares to this. I think I called it jet fuel on fire. And on top of that, the business-friendly environment in Texas gives a lot of Canadians especially a good reason to look at Texas as a place to redomicile a Canadian company. Chuck Yeah, that's exactly right. You form a new company, you replicate basically your Canadian cap table in the United States, you make the Canadian entity a wholly-owned subsidiary so you can continue those operations, and then you have the ability to issue stock that would be QSBS-eligible for U.S. investors in the United States. Brian Well, that's a lot of strategy to think about. And this is all coming fast, the new rules just went into effect. So there's lots to think about. If you're talking directly to a GC of a corporation that may be in one of these situations, what are you telling them? What should they be thinking about right now? Practical advice for general counsel Chuck Yeah. The conversation I just had very recently was one around conversion. It was laying out how attractive this could be: if they were a U.S. top company, they could still have all their operations in foreign subsidiaries. The cost of capital is a big consideration for a senior management team, for a CFO and GC. The familiarity that you get in going to raise and describing to investors the sheer terms of a Texas entity or a Delaware entity, as compared to another jurisdiction, just really greases the wheels and makes the raise a lot smoother. Brian It's a fascinating rule change. And one, I've got to say, that just slid under the radar during the summer with all the talk about tariffs and deficits. It really hasn't got the attention that I think it deserves. What's your prognosis on this? Where do you think it's going, and how is this new rule change going to play out? Chuck Yeah, I think you're going to continue to see more and more focus on this. Like I said at the outset, I think we were distracted by a lot of noise in the summer. But it's another example of a really positive change trying to get ahead of where the market is going and enabling capital formation. We've got another episode where we're going to talk about preemptive legislation in advance of technology developments, in advance of market developments, whether that's autonomous driving or crypto or whatever. And I think this is just another example of a positive change. We're going to see the benefits of this in capital formation for years and decades. Brian Great overview, Chuck. Any final thoughts or other things that people should be aware of? Chuck If you have questions about this, if you're wondering how to structure properly, give us a call. We're happy to walk you through it and partner with you to make this QSBS exclusion available to your shareholders. Brian Perfect. Well, it's been a great walkthrough of the new QSBS rules, and we look forward to updates on boots on the ground, how is it rolling out? How is it affecting our clients in the months to come? And we'd love to hear those actual stories in coming episodes. Chuck Absolutely. We will bring back one of the GCs of one of these successful deals to talk about it. But it's great. Amazing. Brian Thanks, Chuck. Talk again soon. Related practice areas Practice Area Texas Business Law Practice Area Cross-Border Transactions Practice Area Fractional General Counsel Subscribe to the Y'all Street Law Podcast New episodes every other week. Texas business law, corporate governance, capital formation, and the regulatory landscape, hosted by Chuck Kraus and Brian Elliott. Listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm --- ## The Law Firm of the Future: Distributed, AI-Augmented, and Built for Texas, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-14-law-firm-of-the-future/ --- ## Tesla's Robotaxi Law: SB 2807, Preemption, and the True Innovator's Playbook, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-15-autonomous-vehicles-texas/ --- ## 2026 Predictions: Real Estate Reset, the Agentic Law Firm, and Make IPOs Great Again, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-16-2026-predictions/ --- ## Equities in Dallas: How the Liar's Poker Insult Became the Texas Finance Hub, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-2-equities-in-dallas/ --- ## College Sports Pay: NIL, the House v. NCAA Settlement, and What Athletes, Schools, and Brands Need to Do, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-3-college-sports-pay/ --- ## 2024 Reflections and 2025 Predictions | Y'all Street Law Podcast URL: https://kraus.law/podcast/episode-4-2024-reflections/ Y'all Street Law · Episode 4 2024 Reflections and 2025 Predictions March 11, 2025 58:19 Hosted by Chuck Kraus & Brian Elliott Listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm A wide-ranging year-end retrospective covering the year's most significant legislative and business developments. Chuck and Brian discuss the FTC non-compete ban's judicial curtailment, the Corporate Transparency Act, the Texas Stock Exchange's rise, and AI's growing impact on legal practice. What this episode covers FTC non-compete ban judicial curtailment and what it means for Texas employers Corporate Transparency Act and beneficial ownership reporting Texas Business Court's first months in operation Texas Stock Exchange announcement and its implications Artificial intelligence's emerging role in legal practice and governance Predictions for 2025 Texas business law developments Why this episode matters Year-in-review episodes are useful for two reasons: they create a single reference point for what mattered in the prior year, and they expose the host's analytical priorities. This episode established the through-line that would carry through 2025, Texas as an accelerating jurisdiction for business formation, governance reform, and capital-markets innovation, with technology reshaping how legal services get delivered. Related practice areas Practice Area Texas Business Law Practice Area Corporate Governance Practice Area Employment Related reading from the desk Article Non-Competes in Texas Article Texas Business Court at 26 Months Subscribe to the Y'all Street Law Podcast New episodes every other week. Texas business law, corporate governance, capital formation, and the regulatory landscape, hosted by Chuck Kraus and Brian Elliott. Listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm --- ## Business Courts Deep Dive: Six Months In, Plus the Tan Parker Bills and Delaware's SB 21 Reaction, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-5-business-courts-deep-dive/ --- ## Creative Work: Copyright, Joint Authorship, and the Fair Use Trap with Charles Wallace, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-6-creative-work-charles-wallace/ --- ## Inside the Texas Business Courts: The Local Rules, the Mediation Wheel, and the 700-Word Discovery Letter, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-7-inside-texas-business-courts/ --- ## The Texas Stock Exchange Form 1: Listing Standards, the Profitless Unicorn Carve-Out, and NYSE Texas, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-8-texas-stock-exchange/ --- ## Bookmarked: AI-Powered Library Curation, the HB 900 Reversal, and SB 13's New Burden on Texas Schools, Y'all Street Law · Kraus Law URL: https://kraus.law/podcast/episode-9-ai-education-bookmarked/ --- ## Y'all Street Law Podcast | Texas Business Law URL: https://kraus.law/podcast/ Podcast · Hosted by Chuck Kraus & Brian Elliott Y'all Street Law Podcast. Texas business law, every other week. Specialized commercial courts, governance reform, capital formation, and the regulatory landscape, from two corporate attorneys at Scale LLP working in Texas every day. 16 episodes Updated biweekly Since November 2024 Listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm Most Downloaded Where most listeners start. 01 Texas Business Courts December 4, 2024 · 19:28 The inaugural episode introducing Texas's new specialized commercial court system. Chuck Kraus and Brian Elliott unpack what the Texas Business Court … Listen → 14 Inside the Law Firm of the Future: A Conversation with Scale Founder Adam Forrest November 11, 2025 · 31:11 Scale LLP Founder Adam Forrest joins Chuck and Brian to discuss how technology, AI, and a distributed model are reshaping legal practice. A candid con… Listen → 10 The Future of Law: One Rapid-Fire Question at a Time July 1, 2025 · 32:29 Recorded in San Diego at a Scale LLP partner gathering, this special roundtable features eight legal minds answering rapid-fire questions on the futur… Listen → All episodes. 16 Reflections and Predictions: Legal and Business Trends Shaping 2026 Chuck and Brian close out 2025 and look ahead to 2026. A year-in-review covering the most-downloaded episodes, key regulatory changes, AI's expanding role in legal judgment, and predictions for commer… January 6, 2026 34:21 15 How to Navigate Emerging Tech Laws: Breaking Down New Autonomous Vehicle Rules in Texas Texas Senate Bill 2807 cleared the regulatory road for Tesla's Robotaxis by unifying autonomous vehicle rules statewide and defining the autonomous system as the legal driver. Chuck and Brian unpack w… November 25, 2025 23:14 14 Inside the Law Firm of the Future: A Conversation with Scale Founder Adam Forrest Scale LLP Founder Adam Forrest joins Chuck and Brian to discuss how technology, AI, and a distributed model are reshaping legal practice. A candid conversation about where the legal industry is going … November 11, 2025 31:11 13 The Qualified Small Business Stock Boost: Jet Fuel on Fire for Texas Capital Formation The One Big Beautiful Bill Act expanded Section 1202 in the most significant way since 1993. Chuck and Brian unpack the tiered exclusions for shorter holds, the $15M cap, the $75M asset ceiling, and w… October 28, 2025 17:59 12 Texas Data Privacy Turns One: All Hype or Real Impact The Texas Data Privacy and Security Act (TDPSA) one year in. Chuck and Brian discuss how the Attorney General is enforcing it, the Allstate investigation, and what compliance looks like in pr… July 29, 2025 33:21 11 Texas Corporate Law Overhaul: What Boards Need to Know Senate Bill 29 codified the business judgment rule in Texas, raised derivative-action thresholds, and authorized jury waivers and forum-selection clauses in governance documents. Chuck and Brian break… July 15, 2025 35:03 10 The Future of Law: One Rapid-Fire Question at a Time Recorded in San Diego at a Scale LLP partner gathering, this special roundtable features eight legal minds answering rapid-fire questions on the future of legal practice. AI, Delaware vs. Texas, found… July 1, 2025 32:29 09 AI, Education, and the Fight for Library Freedom with BookmarkED Founder Steve Wandler Chuck and Brian sit down with Steve Wandler, founder of BookmarkED, to discuss how AI is being used to navigate library content policies and book censorship debates. A conversation that bridges educat… June 17, 2025 35:25 08 Texas Stock Exchange Shakeup: What It Means for Listings Chuck and Brian unpack the Texas Stock Exchange's listing requirements, regulatory framework, and competitive positioning relative to NYSE and Nasdaq. A focused look at what TXSE means for issuers and… June 3, 2025 12:12 07 Inside the New Texas Business Courts: What Companies Need to Know A focused executive briefing on the Texas Business Court for companies and counsel. Chuck and Brian distill what businesses need to know about jurisdiction, procedure, and the practical implications o… May 20, 2025 21:23 06 Owning Your Work in the Creative World with Charles Wallace Brian Elliott sits down with Charles Wallace, a trademark and entertainment attorney, to explore IP for creators, work-for-hire agreements, music and film licensing, and the structural questions that… May 6, 2025 29:18 05 Ramblin' Through the Texas Business Courts An hour-long deep dive into Texas Business Court operations, the first major episode after the court had been running for several months. Chuck and Brian work through legislative changes, early case … April 1, 2025 1:02:55 04 2024 Reflections and 2025 Predictions A wide-ranging year-end retrospective covering the year's most significant legislative and business developments. Chuck and Brian discuss the FTC non-compete ban's judicial curtailment, the Corporate … March 11, 2025 58:19 03 Getting Paid in College Sports With guest Shannon Straughan, Chuck and Brian explore the rapidly evolving NIL landscape, transfer portal economics, and the legal infrastructure being built around college athlete compensation.… February 19, 2025 57:37 02 Equities in Dallas? Dallas is rising as a financial sector hub. Chuck and Brian discuss the Texas Stock Exchange announcement, Alberta-Texas business connections, and what shifting capital flows mean for Texas-domiciled … January 8, 2025 16:54 01 Texas Business Courts The inaugural episode introducing Texas's new specialized commercial court system. Chuck Kraus and Brian Elliott unpack what the Texas Business Court is, who it serves, and what its arrival means for … December 4, 2024 19:28 Subscribe and don't miss an episode. New episodes every other week. Apple Podcasts, Spotify, YouTube, Amazon Music, or wherever you listen. Listen on Apple Podcasts Spotify YouTube Amazon Music Transistor.fm --- ## Commercial Real Estate Attorney | DFW & Granbury URL: https://kraus.law/real-estate/ Scale LLP Network Commercial real estate requires commercial counsel. Whether you're acquiring a property, negotiating a lease, developing a site, or navigating a zoning challenge, commercial real estate transactions deserve attorneys who understand both the deal and the dirt. One call to Chuck connects you with Scale LLP's real estate practice. What Scale's real estate practice handles Commercial Acquisitions & Dispositions Purchase and sale of commercial property, office, retail, industrial, and mixed-use, including due diligence , title review, and closing. Development & Land Use Site development, entitlements, zoning applications, variances, and land use planning for commercial projects. Leasing Commercial lease negotiation, review, and structuring for landlords and tenants, including NNN, gross, and ground leases. Construction Contracts Owner-contractor agreements, design-build contracts, AIA documents, mechanic's lien compliance, and construction dispute resolution. 1031 Exchanges Like-kind exchange structuring and compliance for tax-deferred real estate transactions. The team behind this practice Scale LLP's real estate practice serves clients across Texas and nationally. The team handles transactions ranging from local commercial acquisitions on the Granbury town square to multi-site development projects across the DFW metroplex. Whether you're buying a building or building from the ground up, Scale's real estate attorneys bring the depth to handle the complexity. How I connect you Real estate isn't my core practice, but it's a regular part of my clients' lives. Business acquisitions often include property. Entity structuring often involves real estate holdings. Exit planning almost always touches a lease or a building. When a transaction has a real estate component, I bring in a Scale real estate attorney who specializes in commercial property. I stay involved on the corporate and transactional side. The result: one firm handling both the deal and the dirt. Common questions Can Chuck handle a simple commercial purchase? Even "simple" commercial real estate transactions involve title, survey, environmental, zoning, and financing complexities that benefit from specialized counsel. I connect you with a Scale real estate attorney and stay involved on the business strategy side. What if my real estate issue is part of a larger business transaction? That's the most common scenario. An M&A deal includes a building. A business restructuring involves reassigning a lease. A capital raise is secured by property. I handle the corporate transaction. The Scale real estate attorney handles the property. One firm, no coordination headaches. Do you cover residential real estate? Scale's practice focuses on commercial real estate. For residential transactions, I'm happy to recommend a local attorney who specializes in residential closings. What areas does Scale's real estate practice cover? Scale has attorneys across 22 states, so the practice is national. For Texas transactions, from the Granbury square to downtown Fort Worth to the DFW metroplex, Scale's real estate team knows the local landscape. Further reading from the desk. Articles and analysis I've written on topics adjacent to this practice area. Acquisitions Buying Commercial Property in Texas What due diligence catches, and what it can't. Read · 9 min Leasing Commercial Leases in Texas The clauses that matter and the ones that don't. Read · 8 min Tax Strategy QSBS After OBBBA Section 1031 considerations and the Texas-specific exit landscape after the 2025 tax changes. Read · 16 min Property decisions are business decisions. One call to Chuck. He'll connect you with the right real estate attorney at Scale LLP. Schedule a Call (682) 529-7177 --- ## Client Reviews & Results | Granbury Business Attorney Chuck Kraus URL: https://kraus.law/results/ Results & Reviews The work speaks. So do the clients. Legal 500 US Elite · Corporate & M&A I don't publish case results with dollar signs and exclamation points. What I can share is the kind of work I've done, the people I've done it for, and what they say about the experience. Types of work I've handled Public company listing via de-SPAC transaction (U.S./Canada) Dual-listing on the TSX and NYSE with full governance framework buildout Cross-border M&A involving parties in the U.S. and Canada Legal department build-out, from zero to full infrastructure (3×) Outsourced General Counsel for growth-stage Texas companies SEC continuous disclosure management for dual-listed public company Board governance framework design for newly public company Equity compensation plan design across two tax jurisdictions Shareholder agreement restructuring for multi-owner businesses Business divestiture, commercial real estate transaction (Grapevine, TX) Entity restructuring ahead of capital raise TBOC compliance update following 89th Legislature amendments What clients say Chuck Kraus brings a lifetime of wise counsel, built in some of the most challenging business arenas in the world, to every relationship with a small town charm. You don't have to go to Dallas or a big city for the best — but you're getting it in humility and grace. Need a sixth star. Mike Williams Google Review · March 2025 ★★★★★ It's amazing that we sold an office building in Grapevine, Texas — Chuck Kraus quickly understood what I wanted and the corresponding paperwork that would be required. A significant transaction was done all on the phone, and I finally met Chuck when he came by to introduce himself. David Johnson Google Review · January 2025 ★★★★★ Chuck was an exceptional General Counsel and partner to the business. Sometimes Legal can be viewed as the 'business prevention department' but it was the exact opposite with Chuck. He was extremely strategic, added valuable contributions across all areas of the business and was a fantastic partner to commercial, enabling us to make business happen. I would highly recommend him to any client seeking exceptional legal and GC support. Jennifer Warawa Former Chief Commercial Officer, DIRTT (TSX: DRT) · December 2022 ★★★★★ Reviews on Google ★★★★★ 5.0 average · 3 reviews Leave a review → The best measure of an attorney isn't what they say about themselves. It's what their clients say about them. Ready to see what 25 years of experience can do for your business? Let's start with a conversation. Schedule a Call (682) 529-7177 Selected writing Recent published analysis on the legal work the firm handles. Cross-Border Transactions: What U.S./Canada Deals Require Read The Texas Data Privacy Act, One Year In Read Data Breach Response: The First 72 Hours Read SB 29 and Your Governance Documents Read --- ## Service Area, Granbury, Texas and Beyond URL: https://kraus.law/service-area/ Service Area Granbury, Texas. National reach. Cross-border practice. Substantive corporate work doesn't require the lawyer to be in the room. The Granbury office anchors the Texas practice. The Scale LLP platform handles everywhere else in the United States. The dual-qualified bar handles Canada. Most matters are delivered through scheduled video meetings and secure document workflows, with in-person attendance for board meetings, closings, and hearings as needed. Texas, the primary practice area Kraus Law is rooted in Granbury, Texas, in Hood County, about forty minutes southwest of Fort Worth and ninety minutes from Dallas. The office on Bridge Street is the firm's physical anchor. The Texas practice is particularly active across the DFW Metroplex (Fort Worth, Dallas, Plano, Frisco, Arlington, McKinney, Grapevine), with substantive engagements in Houston, Austin, and San Antonio. The firm's depth in Texas business law, including the Texas Business Court, SB 29 governance reforms effective May 2025, the Texas Data Privacy and Security Act effective July 2024, and the Business Organizations Code, is reflected throughout the practice and the published Insights. The DFW corridor, proximity as a structural advantage Granbury sits at a structural advantage to the Dallas–Fort Worth region. For matters that benefit from in-person attendance, board meetings, closings, hearings, regulatory engagements, the office is closer to DFW than most Austin or Houston-based firms, and substantially less expensive than the downtown Dallas or Fort Worth alternative. Within 60 minutes Fort Worth, Weatherford, Stephenville, the surrounding Tarrant and Parker County corridors. Same-day in-person presence is routinely feasible. Within 90 minutes Downtown Dallas, the Mid-Cities, Arlington, Plano, and the broader Dallas County footprint. Day-of attendance for scheduled meetings. Across Texas Houston, Austin, San Antonio, and the broader state. In-person presence by planned travel where the matter calls for it. National reach through Scale LLP Chuck Kraus is a Partner at Scale LLP, a distributed national law firm of more than 80 attorneys across 22 states. The Scale platform extends Kraus Law's substantive reach without the friction or cost of separate firm engagements. Clients headquartered or operating in California, New York, Florida, Colorado, Illinois, Washington, and seventeen other states gain access to specialists in litigation, intellectual property, employment, fintech, real estate, and adjacent practice areas as needed, coordinated through Chuck rather than through a parallel firm relationship. The model means a Texas-based client expanding into California, or a New York-based founder establishing a Texas entity, engages one lawyer who marshals the right Scale partners on either side. One retainer. One set of conflicts checks. One intake. Cross-border to Canada Chuck is admitted to the Law Society of Alberta in Canada and has practiced extensively across the Canadian energy and resource sectors, including two tours as General Counsel of Calgary-based dual-listed energy companies and current service as Outside General Counsel to Greenfire Resources (NYSE/TSX: GFR). For Texas companies expanding into Alberta, Saskatchewan, British Columbia, or Ontario, and for Canadian companies establishing U.S. operations in Texas, the cross-border practice eliminates the attorney-to-attorney hand-off that typically fragments these engagements. Provincial filings and Canadian regulatory work that require provincial bar admission are handled in association with Canadian counsel; the cross-border coordination and the U.S. side of the engagement stay with Chuck. Cross-border practice area details → Where we serve The geographic footprint across Texas, the United States, and Canada. Texas, primary practice area Granbury (office location), Fort Worth, Dallas, Houston, Austin, San Antonio. Concentrations in Tarrant County, Dallas County, Hood County, and the DFW Metroplex. Reach across the Texas Hill Country and the broader state. United States, through Scale LLP Eighty-plus attorneys across twenty-two states. Active engagements in California, New York, Florida, Colorado, Illinois, and Washington, with bar coverage in seventeen additional states. Canada, dual-qualified Bar admission in Alberta. Practical experience across Alberta, Saskatchewan, and British Columbia from prior GC tours at Calgary-based dual-listed energy companies. Cross-border coordination with provincial counsel where required. How distance works in this practice Most corporate matters do not require the lawyer to be in the room. Capital raises, governance work, M&A diligence, fractional GC engagements, contract negotiation, and policy development are delivered through scheduled video meetings, secure document portals, and email, with the same substantive depth as an in-person engagement. The Granbury office handles in-person Texas work directly. Scale LLP attorneys handle in-person work elsewhere in the United States as needed. Initial conversations take place over a thirty-minute introductory call, conducted by phone or video. Substantive corporate counsel. Texas roots, national reach. For corporate matters that need attention from substantive counsel, without big-city overhead, let's have that conversation. 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The phone is faster. --- ## Granbury Business Attorney | Texas Business Law, Contracts & M&A URL: https://kraus.law/texas-business-law/ Texas Business Law From formation to exit. And everything your business encounters between. Whether you're structuring a new venture, negotiating a contract that will define your next five years, or planning the transaction that lets you walk away on your terms, I bring 25 years of corporate experience and the resources of an 80-attorney national firm to every engagement. In this practice area The Texas Stack Texas vs Delaware Evaluating Texas Texas Business Court FAQs Your business has outgrown its first attorney You started with an attorney who helped you form your LLC and filed your initial paperwork. That was the right attorney for that stage of your business. But now you're signing larger contracts, hiring people, managing risk, considering a partner or investor, and thinking about what happens in five or ten years. The questions you're asking today require a different depth. I've spent 25 years working with businesses at every stage of the lifecycle, from the formation conversation to the exit negotiation. I think about your legal questions the way you think about your business: strategically, practically, and with an eye on what comes next. Business law capabilities Entity Formation & Structuring LLCs, corporations, partnerships, and joint ventures, structured correctly from the beginning. I don't just file paperwork. I ask the questions that determine whether you need a single-member LLC or a multi-class equity structure, and I build it to support where your business is headed, not just where it is today. Texas entity formation runs through the Business Organizations Code, Chapter 21 for for-profit corporations, Chapter 101 for limited liability companies, Chapter 152 for partnerships. TBOC §3.005 sets the floor for what every certificate of formation must contain; the supplemental provisions for each entity type add the operational structure on top. The decisions made at this stage compound for years afterward. Contracts & Commercial Agreements Drafting, reviewing, and negotiating the agreements that move your business forward. Vendor contracts, customer agreements, service agreements, licensing deals, NDAs, and the commercial terms that protect your position without killing the deal. M&A, Buying or Selling a Business Whether you're acquiring a competitor, merging with a partner, or selling the business you've built, I handle the transaction from letter of intent through closing. Due diligence , deal structure, purchase agreements, representations and warranties , and post-closing integration. Mergers in Texas are filed through TBOC §10.151 (Certificate of Merger and Exchange). Asset purchases, conversions, and interest exchanges have their own statutory frameworks within Chapter 10. The deal documents that translate business intent into legal effect are where most of the value gets captured, or lost. Capital Raises & Investor Relations Equity and debt financing, term sheets , subscription agreements , investor rights, and the securities compliance that comes with bringing in outside capital. I've raised money on both sides of the border and I know what investors expect, and what founders should protect. Capital raises in Texas implicate the Texas Securities Act, recodified effective January 1, 2022 at Texas Government Code Chapters 4001–4008 . Older treatments still cite the prior Civil Statutes article numbers; the modern codification is the authoritative reference. Most Texas private placements use exemptions under Chapter 4005, often paired with federal Regulation D filings. Shareholder & Partnership Agreements Buy-sell agreements , operating agreements , shareholder rights, drag-along and tag-along provisions, and the governance terms that prevent partner disputes from becoming litigation. These agreements are the foundation of every multi-owner business. Getting them right at the beginning costs a fraction of fixing them later. Texas shareholders' agreements operate under TBOC §21.101 and the related provisions in Subchapter B of Chapter 21. Related-party transactions sit under TBOC §21.418 , the section governing contracts and transactions involving interested directors and officers. Exit Planning If you're building toward a sale, a transition, or a succession, the planning should start years before the transaction. I help business owners understand their options, structure the business for maximum value, and execute the exit on terms that reflect what they've built. Business Risk Audits A structured review of your contracts, insurance, compliance obligations, and operational exposure. Most business owners don't know where their risk concentrations are until something goes wrong. I find them first. The Scale bridge: When your business needs IP protection , a real estate transaction , employment counsel , or litigation support , I bring in a Scale LLP colleague. One relationship. National depth. The Texas Business Law Stack Four statutes define the working framework of Texas business law in 2026. Each layer builds on the foundation underneath it, and decisions made at one layer affect the options available at the next. Texas businesses operating without an understanding of how the stack fits together typically miss optimization opportunities, or miss compliance obligations. 1 Business Organizations Code The Texas Business Organizations Code ( BOC ) is the foundational layer. Entity formation (LLCs, corporations, partnerships, professional entities), internal affairs governance, member and shareholder rights, fiduciary duties, dissolution, merger, and conversion all live here. For any Texas entity, the BOC is the default operating manual, and decisions to opt in to SB 29 provisions or opt out of default duties are layered on top of this foundation. Get the BOC right, and the other layers stack cleanly. 2 Senate Bill 29 Effective May 2025, SB 29 reformed multiple aspects of Texas corporate governance: codified business judgment rule application under TBOC § 21.419(c), expanded fiduciary duty modification options, established a 3% ownership threshold for derivative suits (§ 21.552(a)(3)), codified jury trial waivers (§ 2.115), and tightened books-and-records demand procedures (§ 21.218). Many SB 29 provisions are opt-in or opt-out by charter or operating-agreement choice, not automatic. The bill's benefits depend on entity-specific governance decisions made deliberately. 3 Texas Data Privacy and Security Act TDPSA , effective July 2024, is Texas's comprehensive consumer privacy law, modeled on Virginia's VCDPA but with Texas-specific provisions including small business exemptions, sensitive data carve-outs under § 541.107, and the Attorney General's enforcement framework. For businesses processing consumer personal data above statutory thresholds, TDPSA compliance is mandatory. The first state enforcement action, Allstate, filed January 2025 in Montgomery County, signaled the AG's seriousness about enforcement. Smaller businesses should evaluate exemption mechanics annually as the business grows. 4 Texas Business Court Operational September 2024, the Texas Business Court is a specialized commercial court with concurrent jurisdiction over complex business disputes meeting the $5M jurisdictional threshold. Bench trials are standard; specialized judges with substantive business law expertise; jurisdictional eligibility continues to expand. For Texas entities entering significant contracts or facing governance disputes, the Business Court is now a strategic factor in forum selection and dispute resolution planning. Forum-selection clauses designating the Business Court are increasingly common. Texas vs Delaware, general business jurisdiction A comparison across the dimensions most often raised by businesses choosing between Texas and Delaware for entity formation, redomestication, or restructuring. This is a different angle from a pure governance comparison, it covers the broader operating environment for Texas-based businesses. Dimension Delaware Texas Entity formation cost $90 LLC filing fee; annual $300 franchise tax for LLCs $300 LLC filing fee; franchise tax applies at $2.47M revenue threshold Franchise / margin tax Flat-rate annual franchise tax based on entity type and shares Margin tax based on revenue; many entities exempt below threshold Specialized commercial court Court of Chancery, centuries of jurisprudence; bench trials standard Texas Business Court (Sept 2024); $5M threshold; bench trials standard Governance framework DGCL, extensive caselaw; well-known to investors TBOC + SB 29, codified business judgment rule; modification flexibility Choice-of-law and forum clauses Generally enforceable; DGCL § 115 confirmed exclusive-forum bylaws Codified under TBOC § 2.115 (SB 29); Texas Business Court designation increasingly common Filing confidentiality Member/manager names not required on public filings Public filings disclose more entity detail; some confidentiality available via series LLC and trust structures Counsel and talent pool Deep concentration of corporate law expertise; investor familiarity Substantial and growing; major firms with Texas corporate practices; specialist boutiques Recent direction Litigation environment scrutinized post- Tornetta ; some redomestication outflow Receiving redomestication inflow; legislative posture broadly business-friendly This comparison reflects statutory and regulatory provisions as of May 2026. Specific decisions depend on entity-specific facts, including tax structuring, investor preferences, and operational footprint. Not legal advice. How to evaluate Texas as a jurisdiction for your business A five-step framework for businesses considering Texas, whether for fresh formation, redomestication from another state, or restructuring an existing footprint. The right answer is business-specific. The right process is not. 1 Assess current jurisdiction's fit Inventory where the entity is formed today, where it operates, where its investors and stakeholders are, and what friction the current jurisdiction creates. Most jurisdiction reviews are triggered by specific friction, disclosure burden, governance constraints, tax cost, litigation exposure. Identify the actual friction before evaluating alternatives. 2 Evaluate operational and tax considerations Compare franchise tax and margin tax exposure across jurisdictions. Consider sales tax, employment tax, and any industry-specific tax treatment. For Texas, the margin tax exemption threshold and the absence of state income tax are often material. Run the numbers honestly based on actual projected revenue. 3 Review governance preferences Consider how SB 29's opt-in and opt-out framework matches the business's actual governance structure. For some entities, the flexibility is material; for others, the Delaware framework is closer to the actual practice. Review charter and operating agreement implications carefully. 4 Consider litigation profile Texas Business Court eligibility, forum preference for the kinds of disputes the business may face, jury trial preferences, and counsel availability all factor in. For businesses likely to face complex commercial disputes, the Business Court's $5M jurisdictional threshold and specialized judges are material. 5 Plan transition or fresh formation If redomestication is warranted, evaluate the mechanism: domestication, conversion, dissolution-and-reformation, or statutory merger. Each has different tax consequences, governance continuity implications, and timing. Document the decision and the rationale at the board level before executing. The Texas Business Court, what it means for your contracts and governance. Texas launched a specialized Business Court on September 1, 2024 (created by House Bill 19, codified at Texas Government Code Chapter 25A ). House Bill 40, effective September 1, 2025, lowered the jurisdictional threshold for most case categories from $10 million to $5 million, and broadened the court's reach to include intellectual property, trade secrets, software, and data security disputes. The court has eleven divisions; the Eighth Division sits in Fort Worth , the closest division to Granbury. What it means in practice. Commercial contracts now have a forum-selection question that didn't exist three years ago, whether to include a clause directing qualifying disputes to the Business Court. Shareholder agreements and governance documents matter more, because the court has jurisdiction over fiduciary duty disputes, derivative actions, and TBOC-based actions involving publicly traded companies regardless of dollar threshold. The clearer your governing documents are about decision rights and dispute resolution, the more predictable the forum analysis becomes if a dispute develops. I don't litigate, but I advise on the upstream documentation, drafting contracts, governance documents, and shareholder agreements with the Business Court forum in mind. The court is now part of the Texas commercial landscape, and these are decisions worth thinking through before any dispute develops. Practicing in Granbury, serving across Texas. My office is at 205 E Bridge Street on the Granbury town square, across from the Hood County Courthouse. From that square I serve businesses across the DFW metroplex and the wider state. Granbury is a real working town with a real working business community, and the one thing that's been missing is sophisticated corporate counsel without the Dallas drive and the Dallas billing rate. Most of my Texas clients are in Hood, Tarrant, Parker, Erath, Johnson, and Somervell Counties , the corridor running west and south from Fort Worth. I also work with businesses across the broader DFW metroplex, the Hill Country, and increasingly across the state as the work has spread by referral. When you do need Dallas, for federal court litigation, for a specialty venue, for IP work that needs a registered patent attorney, I bring it to you through the Scale LLP platform. Eighty attorneys distributed across the country. Dallas-licensed colleagues, Houston-licensed colleagues, Austin-licensed colleagues. You pick up the phone and call me. The expertise gets routed quietly behind the scenes. The point is to give Granbury and Hood County businesses access to the same caliber of corporate counsel a Tarrant County business would expect to find in downtown Fort Worth, without making them drive to Fort Worth or Dallas to get it. The infrastructure exists. This is just an effort to meet Texas businesses where they are. Y'all Street Law Podcast. Each week I co-host the Y'all Street Law Podcast with my Scale LLP colleague Brian Elliott . The podcast focuses on Texas business law, the legislative cycle, the court system, the statutory and regulatory shifts shaping how businesses operate in the state. Recent episodes have covered the new Texas Business Court, the Texas Stock Exchange, the One Big Beautiful Bill's QSBS changes, the Texas Data Privacy & Security Act, and a year-in-review of 2025 Texas business law developments. The podcast is available on Apple Podcasts, Spotify, Amazon Music, YouTube, and at yallstreet.transistor.fm . If you're a Texas business owner or someone advising one, it's a steady weekly read on what's changing. Client Testimonial It's amazing that we sold an office building in Grapevine, Texas — Chuck Kraus quickly understood what I wanted and the corresponding paperwork that would be required. A significant transaction was done all on the phone, and I finally met Chuck when he came by to introduce himself. David Johnson Google Review · ★★★★★ Frequently asked questions Do I need a business attorney or can my personal attorney handle this? If you're signing contracts, managing employees, dealing with investors, or planning a significant transaction, you need an attorney who works in business law every day. Estate planning attorneys, family lawyers, and general practitioners are excellent at what they do, but corporate transactions, governance, and commercial agreements require specific expertise and current knowledge. When should I start thinking about exit planning? Three to five years before you want to sell. The highest-value exits are built, not stumbled into. Entity structure, tax planning, contract cleanup, key-person risk, and buyer positioning all take time. If you're starting to think about it, that's the right time to call. Do you handle litigation? I focus on transactional and advisory work. If your matter involves litigation, I bring in a colleague from Scale LLP's litigation practice, experienced trial attorneys who can handle the dispute while I continue advising on the business side. You don't lose your business attorney when a lawsuit arrives. How are you different from other business attorneys in Granbury? I've spent 25 years in corporate law, including three tours as General Counsel of public companies, a decade in the C-suite, and dual-country licensing. Most business attorneys in smaller markets, and they're excellent people, haven't had the opportunity to work at that level. I have, and I chose to bring that experience to this market. When your business needs sophisticated counsel, you shouldn't have to drive to Dallas to get it. What industries do you work with? My practice isn't limited to a single industry. I've worked with companies in technology, energy, financial services, construction, manufacturing, professional services, and real estate. The common thread is complexity, businesses making decisions that have significant legal and financial implications. What's the new Texas Business Court, and does my company need to think about it? The Texas Business Court launched September 1, 2024, and was significantly broadened by House Bill 40 effective September 1, 2025, most case categories now have a $5 million threshold (down from $10 million), and jurisdiction now covers intellectual property, trade secrets, software, and data security disputes in addition to governance, fiduciary duty, securities, and high-value contract matters. Eleven divisions exist statewide; the Eighth Division sits in Fort Worth. Most small-to-mid-market businesses won't see a dispute that reaches Business Court jurisdiction, but the contracts you sign today often outlive your assumptions about scale, and forum-selection clauses written now can determine where a future dispute gets resolved. The newer the contract, the more this is a real consideration. Should I incorporate in Texas or Delaware? The honest answer is: it depends on what you're building, who your investors will be, and how much you value Texas's evolving alternative to the Delaware Chancery system. Delaware remains the default for venture-backed companies, most VC term sheets assume Delaware C-Corps, and Delaware corporate law is more developed because it's been litigated for over a century. But Texas has been steadily building a competing framework: the new Business Court, recent amendments to the Business Organizations Code (SB 29 and HB 40), a management-friendly statutory regime, and significant scrutiny of recent Delaware Chancery decisions involving controller-conflict transactions. For founder-controlled businesses that don't expect institutional VC, Texas can be a strong choice, particularly with the operational and tax advantages of staying in-state. The answer is fact-specific, and worth having early, before formation costs and contractual commitments make it harder to change. Related expertise Fractional General Counsel Growing Texas businesses often need more than transactional help, they need a strategic partner. Learn more Corporate Governance As your business scales, governance frameworks protect you and your partners. Learn more Further reading TXSE Foreign Private Issuer Listings The Texas Stock Exchange opens Q4 2026. Rule 16.312 governs FPI listings, the strategic case for Texas-domiciled companies and the broader market shift toward Texas as a corporate-law jurisdiction. Read essay Texas Business Law: Formation to Exit The full lifecycle in one piece, entity choice, contracts, governance, capital, and the exit conversation. Read essay Starting a Business in Texas The legal decisions that matter most, and the ones that don't. Read essay Raising Capital in Texas Reg D, term sheets, accredited investor diligence, and what investors expect. Read essay Selling Your Business in Texas From decision to close, the owner's roadmap. Read essay Business Succession Planning in Texas How to build value years before the transaction so the exit reflects what you've built. Read essay From the Y'all Street Law podcast Brian Elliott and I cover the developing landscape of Texas business law in long-form conversation. Episodes most relevant to this practice area: Episode 1 Texas Business Courts Launch The September 2024 launch of the specialized commercial court that changed the calculus for every Texas business. Listen Episode 7 Inside the Texas Business Courts How the Texas Business Court works in practice, judges, opinions, and the procedural mechanics that matter. Listen Episode 11 Texas Corporate Law Overhaul SB 29, SB 1057, and the legislative package that reset the Texas business law landscape in 2025. Listen Episode 12 Texas Data Privacy Turns One The TDPSA after one year of enforcement, and what the Allstate matter signals about the AG's posture going forward. Listen Episode 16 2026 Predictions The next year of Texas business law, and the structural shifts every Texas business should know about. Listen Defined terms in this practice area Each term links to a statutorily-grounded definition in the Kraus Law glossary, with citations and Texas-specific application notes. LLC letter of intent Due diligence representations and warranties term sheets subscription agreements Buy-sell agreements operating agreements drag-along and tag-along View the complete Texas Business Law Glossary → Your business deserves the same counsel Dallas companies take for granted. Has your lawyer done this before? Let's have that conversation. Begin a Conversation (682) 529-7177 --- ## Scale LLP | 80+ Attorneys, 22 States | The Firm Behind Kraus Law URL: https://kraus.law/the-firm/ The Firm I'm your first call. Behind me are eighty more. Scale LLP is a national law firm of 80+ attorneys across 22 states. Founded by former Silicon Valley tech company General Counsels. Recognized by Reuters as the "Wave of the Future." How the relationship works When your needs go beyond my focus areas, and they will, I don't send you to a stranger. I bring in a colleague I know, who operates under the same firm, the same standards, and the same commitment to getting it right. You One call. One number. Chuck Your counsel. Your quarterback. Scale LLP 80+ attorneys. 22 states. You call me. I handle your core legal work, corporate transactions, governance, cross-border matters, and day-to-day business counsel. When a matter requires specialized expertise, I bring in the right Scale attorney. I stay involved in every engagement. I'm not passing you off, I'm bringing in reinforcement. The relationship stays with me. The expertise expands to match whatever you need. One Firm. Seven Practice Areas. What the firm covers Corporate & Securities Chuck's Focus M&A, venture and growth capital, securities compliance, public company governance, de-SPAC transactions, shareholder agreements, and strategic exits. This is where I spend most of my time, and where 25 years of experience, three GC tours, and dual-country licensing come together. General Counsel Services Chuck's Focus Outsourced general counsel for companies that need GC-level thinking without a full-time hire. I've established legal departments at three companies. I know what the role requires because I've done it, board preparation, contract systems, risk frameworks, compliance architecture, vendor management, and the judgment calls that keep a company moving without exposure. Litigation Scale Network Commercial disputes, contract litigation, shareholder and partnership disputes, white-collar defense, internal investigations, and arbitration. Scale's litigation practice includes a former federal prosecutor from the Jack Smith investigation, the kind of experience that changes the dynamic in any dispute. Intellectual Property Scale Network Patent prosecution and licensing, trademark protection, trade secret strategy, and IP portfolio management. Scale's IP practice was strengthened by the acquisition of Creedon PLLC, a recognized Texas IP boutique whose founder now serves as Scale's Deputy Managing Partner for Impact Initiatives. Real Estate & Land Use Scale Network Commercial acquisitions and dispositions, development, land use and zoning, construction contracts, and landlord-tenant matters. Whether you're buying a building on the Granbury square or developing a commercial site in DFW, Scale's real estate team handles the complexity. Fintech & Financial Services Scale Network Regulatory compliance, payment systems, blockchain and digital assets, lending, and financial technology licensing. Scale's fintech practice is led by attorneys who have served as general counsel at major fintech companies, they know both the regulatory framework and the business model. Employment Scale Network Workplace policies, executive agreements, employee disputes, wage and hour compliance, severance negotiations, and employment litigation. When an employment issue arises, and it will, I bring in a Scale employment specialist who can address it without disrupting the business relationship I've built with you. About Scale LLP Founded by General Counsels who believed the traditional law firm model was broken. Scale LLP is a national law firm built by former Silicon Valley tech company General Counsels. The firm has grown to 80+ attorneys across 22 states, with practice groups spanning corporate and securities, litigation, intellectual property, real estate, employment, and fintech. 80+ Attorneys 22 States Reuters "Wave of the Future" Legal 500 Recognition U.S. Elite Rankings, partner recognition Former Federal Prosecutor Jack Smith investigator joined as litigation partner Fathom Law Merger Venture capital and startup specialty added Creedon PLLC Acquisition Texas IP boutique, Reisman Award winner Visit scalefirm.com → What clients say about Scale As Sundae's outside general counsel, Scale provides operational and product advice with a business savvy I have not experienced with any other law firm. Andrew Swain Co-Founder, Sundae & Former CFO, Airbnb Whether your question is corporate, IP, real estate, or something you're not sure how to categorize, start here. One call. One relationship. A national firm behind every engagement. Begin a Conversation (682) 529-7177 Selected writing Published analysis on the topics that define the firm's work. Cross-Border Transactions: What U.S./Canada Deals Require Read SB 29 and Your Governance Documents Read --- ## Trackers, Reference Resources URL: https://kraus.law/trackers/ Kraus Law Reference Trackers, reference resources on Texas business law. Three living reference works maintained by Kraus Law on the Texas business law trends that matter, redomestication patterns, Texas Business Court activity, and SB 29 governance reform adoption. Active trackers Reference Tracker · Updated May 2026 Texas Redomesticators 2024-26. 17 public and private companies that have redomesticated to Texas since January 2024, ExxonMobil, Dell, Tesla, Coinbase, SpaceX, and the broader 2026 proxy season wave. Sortable data with origin, date, mechanism, and stated rationale per entry. Reference Tracker · Updated May 2026 Texas Business Court Cases. Substantive opinions from the Texas Business Court since it opened September 1, 2024, jurisdictional precedent, contract construction, fiduciary rulings, and the first jury trial. Sortable by case, citation, date, division, judge, or topic. Reference Tracker · Updated May 2026 SB 29 Adopters. Public companies that have publicly disclosed adoption of SB 29 opt-in provisions, exclusive Texas forum, jury trial waivers, 3% derivative thresholds, BJR opt-in. Tracking the post-May 2025 governance reform wave. --- ## SB 29 Adopters, Tracker URL: https://kraus.law/trackers/sb-29-adopters/ Reference Tracker · Texas Governance Reform SB 29 Adopters. 10 public companies tracked as having publicly disclosed adoption of Texas SB 29 opt-in provisions in their charter amendments or proxy filings since SB 29 took effect May 14, 2025. If you read nothing else Texas Senate Bill 29 (effective May 14, 2025) reformed multiple aspects of Texas corporate governance, codifying the business judgment rule, allowing 3% ownership thresholds for derivative suits, permitting exclusive Texas forum designation, allowing jury trial waivers, and expanding fiduciary duty modification options for LLCs and limited partnerships. Most provisions are opt-in or apply only on certain conditions. Some provisions apply automatically to corporations listed on national securities exchanges (codified BJR under TBOC § 21.419(c)). Others require affirmative adoption via charter amendment or governing document election (3% derivative threshold under § 21.552(a)(3); exclusive Texas forum under § 2.115(b)(2); jury trial waiver under § 2.116). This tracker focuses on the latter, publicly-disclosed elections by public companies, primarily those redomesticating to Texas during the 2025-26 proxy seasons. The data Publicly-disclosed SB 29 adoptions by public companies. Click column headers to sort. "Proposed" indicates board approval pending shareholder vote. Company Ticker Redomestication Adoption Date BJR Opt-In Exclusive Forum Jury Waiver 3% Derivative Tesla, Inc. TSLA Delaware → Texas (June 2024) Charter, 2024-2025 Automatic (NYSE-listed) Yes, Texas Yes Disclosed Coinbase Global, Inc. COIN Delaware → Texas (Nov 2025) November 2025 Automatic (NASDAQ-listed) Yes, Texas Business Court Yes Disclosed ExxonMobil Corp. XOM New Jersey → Texas (March 2026, pending vote) March 2026 proxy Automatic (NYSE-listed) Proposed, Texas Proposed Proposed Dell Technologies DELL Delaware → Texas (May 2026, pending vote June 25) May 2026 proxy Automatic (NYSE-listed) Proposed, Texas Proposed Proposed TTEC Holdings, Inc. TTEC Delaware → Texas (2026 proxy season) 2026 proxy season Automatic (NASDAQ-listed) Proposed, Texas Proposed Proposed Dream Finders Homes DFM Delaware → Texas (2026 proxy season) 2026 proxy season Automatic (NYSE-listed) Proposed, Texas Business Court Proposed Proposed ArcBest Corporation ARCB Delaware → Texas (2026 proxy season) 2026 proxy season Automatic (NASDAQ-listed) Proposed, Texas Proposed Proposed Texas Capital Bancshares TCBI Delaware → Texas (2026 proxy season) 2026 proxy season Automatic (NASDAQ-listed) Proposed, Texas Proposed Proposed eXp World Holdings EXPI Delaware → Texas (2026 proxy season) 2026 proxy season Automatic (NASDAQ-listed) Proposed, Texas Proposed Proposed Weatherford International plc WFRD Ireland → Texas (2026 proxy season) 2026 proxy season Automatic (NASDAQ-listed) Proposed, Texas Proposed Proposed Last updated: May 12, 2026 Methodology and sources What this tracker includes Public companies that have publicly disclosed in their proxy statements, charter amendments, or board materials that they are adopting one or more SB 29 opt-in provisions. The current universe is largely public companies redomesticating to Texas during the 2025-26 proxy seasons, whose charter amendments incorporate the relevant Texas governance framework. This is intentionally a narrower scope than "all entities benefiting from SB 29", many SB 29 provisions apply automatically to public corporations listed on national securities exchanges (codified business judgment rule), and private entity adoptions are generally not public records. The four trackable provisions BJR Opt-In , Codified business judgment rule under TBOC § 21.419(c). Applies automatically to publicly-traded Texas corporations; private entities must affirmatively elect in their governing documents. Exclusive Texas Forum , TBOC § 2.115(b)(2). Allows entities to designate a specific Texas court (typically the Texas Business Court) as exclusive forum for internal entity claims. Jury Trial Waiver , TBOC § 2.116. Allows entities to include binding jury trial waiver in governing documents for internal entity claims. 3% Derivative Threshold , TBOC § 21.552(a)(3). Allows public corporations (and corporations with 500+ shareholders that have elected the BJR) to require shareholders to own at least 3% to bring derivative actions. What this tracker does not include Private LLCs and limited partnerships adopting SB 29's expanded fiduciary duty modification provisions, these adoptions are generally not public records and cannot be reliably tracked. Existing Texas corporations that have amended their bylaws without making public disclosures are also not captured. Compiled by Kraus Law PLLC. Corrections or additions welcome at hello@kraus.law . Patterns and observations What the first year of SB 29 adoption tells us about Texas governance reform. Adoption is concentrated in redomesticators The companies publicly disclosing SB 29 adoption are overwhelmingly companies redomesticating to Texas from Delaware (or other jurisdictions). Their new Texas charters typically incorporate the full suite of opt-in provisions, exclusive Texas Business Court forum, jury trial waiver, 3% derivative threshold, as part of the redomestication package. Existing Texas-domiciled companies have been slower to amend Texas-domiciled public companies that have NOT redomesticated have been slower to amend their existing charters to opt in to SB 29 provisions. This may reflect: (1) the absence of an immediate trigger (charter amendments typically piggyback on other amendments); (2) the absence of clear case-law guidance on enforceability of certain provisions; (3) the practical reality that codified BJR already applies automatically to listed corporations. The 2027 proxy season may see broader Texas-domiciled adoption. Private entity adoption is invisible SB 29's most expansive provisions affect LLCs and limited partnerships, particularly the elimination or modification of fiduciary duties under TBOC § 101.401 (as amended). These adoptions occur in governing documents (operating agreements, partnership agreements) that are not public records. Conversations with Texas business law practitioners suggest significant private-entity adoption is occurring, but it cannot be tracked through public sources. Exclusive Texas forum is the most-adopted provision Across the disclosed adopters, exclusive Texas forum designation appears most frequently, typically pointing to the Texas Business Court as the chosen forum. This is consistent with broader litigation strategy: companies want predictable forum, specialized commercial judges, and the bench-trial default of the Business Court. Related reading and listening Insights · Governance SB 29 governance documents, what changed and what to update. The codified business judgment rule, the 3% derivative threshold, the exclusive forum provisions, and what Texas entities should update. Practice · Governance The Four Pillars of Texas Governance Post-SB 29. Director independence, information rights, fiduciary duty calibration, and derivative litigation strategy under the new framework. Reference Tracker Texas Redomesticators 2024-26. The 17 public and private companies that have redomesticated to Texas since 2024. Reference Tracker Texas Business Court Cases. Decided cases from the Texas Business Court, the forum designated by SB 29's exclusive forum provisions. Updating governance documents for SB 29? Whether you're a Texas-domiciled company evaluating which opt-in provisions to adopt, a redomesticator drafting a new Texas charter, or an LLC considering fiduciary duty modifications, the specific decisions are entity-specific. Begin a Conversation --- ## Texas Business Court Cases, Tracker URL: https://kraus.law/trackers/texas-business-court-cases/ Reference Tracker · Texas Business Court Texas Business Court Cases. 47 substantive opinions tracked since the Texas Business Court opened September 1, 2024, including the inaugural jury trial (Quintero), the Mavericks v. Stars contract dispute, the Marathon Oil v. Mercuria Energy force-majeure trilogy, and foundational jurisdictional rulings. If you read nothing else The Texas Business Court has been operational since September 1, 2024, a specialized commercial court with concurrent jurisdiction over business disputes meeting the $5M jurisdictional threshold (reduced from $10M by HB 40 effective September 1, 2025). The first 19 months produced more than 80 published opinions, with the court progressing from foundational jurisdictional rulings (late 2024) to substantive merits decisions, the first bench and jury trials, and the first directed verdict (early 2026). This tracker maintains the substantive opinions worth citing, jurisdictional precedent, contract construction, fiduciary duty rulings, governance decisions, and major trials. Each entry links to the underlying opinion; the court publishes all opinions at txcourts.gov/businesscourt/opinions/. The data 47 verified substantive Texas Business Court opinions. Click column headers to sort. Case Citation Date Division Judge Topic Summary Energy Transfer v. Culberson Midstream 2024 Tex. Bus. 1 October 30, 2024 1st Div. Whitehill, J. Jurisdiction Granted motion to remand case to district court. Cases filed before September 1, 2024 not removable to Business Court under Section 8 of H.B. 19. Synergy Global v. Hinduja Global 2024 Tex. Bus. 2 October 31, 2024 1st Div. Whitehill, J. Jurisdiction Granted remand. Pre-September 1, 2024 cases removed to Business Court must be returned to district court. TEMA Oil and Gas v. ETC Field Services 2024 Tex. Bus. 3 November 6, 2024 8th Div. Bullard, J. Jurisdiction After construing H.B. 19, removal is not permitted for cases filed before September 1, 2024. Sanctions denied. Winans v. Berry 2024 Tex. Bus. 5 November 7, 2024 4th Div. Barnard, J. Jurisdiction Chapter 25A applies only to cases commenced on or after September 1, 2024. 2022 suit cannot be removed. Lone Star NGL v. EagleClaw Midstream 2024 Tex. Bus. 8 December 20, 2024 11th Div. Adrogué, J. Jurisdiction Even with post-September 1 written agreement consenting to Business Court jurisdiction, pre-September 1, 2024 cases cannot be heard. Certified for permissive interlocutory appeal. C Ten 31 v. Tarbox 2025 Tex. Bus. 1 January 3, 2025 3rd Div. Andrews, J. Jurisdiction Section 25A.004(e) incorporates the amount-in-controversy limit of the underlying subsection. Burden-shifting framework on amount-in-controversy challenges adopted. Osmose Utilities v. Navarro County Electric 2025 Tex. Bus. 3 January 31, 2025 1st Div. Bouressa, J. Jurisdiction Removal of an action means removal of the entire suit, partial removal of individual claims is not permitted. Sebastian v. Durant 2025 Tex. Bus. 4 February 4, 2025 11th Div. Sharp, J. Jurisdiction Under Section 8 of H.B. 19, an entire civil action commences with the filing of the original petition. Chapter 25A permits removal of an action, not partial removal of individual claims. SafeLease v. Storable 2025 Tex. Bus. 6 February 10, 2025 3rd Div. Andrews, J. Procedure 30-day period for removal does not begin before the action is filed. An action may satisfy jurisdictional amount-in-controversy minimums even when no party seeks damages. Cypress Town Center v. Kimco Realty 2025 Tex. Bus. 8 February 25, 2025 11th Div. Adrogué, J. Jurisdiction Joinder of a publicly-traded company after September 1, 2024 does not confer Business Court jurisdiction over a case filed pre-September 1, 2024. Primexx Energy Opportunity Fund v. Primexx Energy Corp. 2025 Tex. Bus. 9 March 10, 2025 1st Div. Whitehill, J. Partnership Partner fiduciary duties of loyalty and care cannot be eliminated even where the partnership agreement limits them. Addresses drag-along rights and partner obligations. ET Gathering & Processing v. Tellurian Production 2025 Tex. Bus. 11 March 11, 2025 11th Div. Barnard, J. Jurisdiction Plea to the jurisdiction denied. Defendant did not produce evidence that plaintiff's amount-in-controversy pleading was a sham. Atlas IDF v. NexPoint Real Estate Partners 2025 Tex. Bus. 16 May 13, 2025 1st Div. Whitehill, J. Jurisdiction Comprehensive opinion on "qualified transaction" under Chapter 25A, when an action "arises out of" a qualified transaction, the relevant period for aggregate value determination, and the burden for establishing the same. Slant Operating v. Octane Energy Operating 2025 Tex. Bus. 22 May 23, 2025 8th Div. Bullard, J. Jurisdiction Plea to jurisdiction denied. Plaintiff's allegations and defendant's failure to refute met the burden under Section 25A.004(d)(1). Reed v. Rook TX 2025 Tex. Bus. 23 June 18, 2025 3rd Div. Andrews, J. Internal Affairs Action concerns limited partnership's "governance, governing documents, or internal affairs" under Section 25A.004(b)(2). Section 25A.004(b)(2) applies even where internal affairs are not the predominant focus. Martens v. Lamkin Land & Cattle Co. 2025 Tex. Bus. 32 August 14, 2025 8th Div. Stagner, J. LLC Business Court has subject-matter jurisdiction over plaintiff's application for involuntary winding-up of an LLC. Dominant jurisdiction doctrine does not apply where prior district court case is not sufficiently interrelated. Chaudhry v. Stillwater Capital Investments 2025 Tex. Bus. 31 August 12, 2025 1st Div. Whitehill, J. Jurisdiction Comprehensive opinion addressing whether common law and statutory fraud inducing entry into LLC company agreement constitutes "internal affairs"; case-wide amount in controversy encompasses counterclaims. Marathon Oil v. Mercuria Energy 2025 Tex. Bus. 36 September 18, 2025 11th Div. Andrews, J. Contract Force-majeure dispute under NAESB base-contract. Both transaction confirmations combine with base contract to form a single, integrated agreement. Riverside Strategic Capital v. CLG Investments 2025 Tex. Bus. 35 September 17, 2025 1st Div. Whitehill, J. Limitations Addresses statute of limitations accrual and the discovery rule for fraudulent statements in securities purchase agreements. Barrett v. Barrett 2025 Tex. Bus. 37 September 23, 2025 4th Div. Barnard, J. Jurisdiction Claims arising out of Title 9 of the Property Code (trusts) are not within Business Court jurisdiction. Supplemental jurisdiction under Section 25A.004(g) requires agreement of all parties. Arnold v. Blue Ridge Landfill 2025 Tex. Bus. 38 October 7, 2025 11th Div. Sharp, J. Contract Denying defendant's summary judgment motion. Royalty payment contract interpretation re: revenue from disposal of solid waste partially on and partially off the Property. Marathon Oil v. Mercuria Energy (Winter Storm Uri) 2025 Tex. Bus. 39 October 14, 2025 11th Div. Andrews, J. Contract Force-majeure dispute arising from Winter Storm Uri. Contract did not obligate seller to purchase gas on spot market or buy back delivery obligation as prerequisite or alternative to declaring force majeure. Marathon Oil v. Mercuria Energy (Liquidated Damages) 2025 Tex. Bus. 40 October 28, 2025 11th Div. Andrews, J. Contract Fact issues preclude determination of whether liquidated-damages clause is an unenforceable penalty. Defendant's cost-basis theory is not the correct measure of plaintiff's actual damages under the circumstances. Cadence McShane Construction v. Ryan BB-Blockhouse Creek 2025 Tex. Bus. 43 November 3, 2025 3rd Div. Sweeten, J. Jurisdiction Third-party claims against subcontractors met the "qualified transaction" definition under Section 25A.004(d)(1). Plea to the jurisdiction denied. Lensabl v. RBH SPE One 2025 Tex. Bus. 44 November 5, 2025 8th Div. Stagner, J. Pleading Rule 91a motion to dismiss granted in part, pleadings fail to state a legally cognizable claim for breach of contract or veil piercing. Fraud claim adequately pleaded. City Choice Group v. TMC Grand Blvd Land Co. 2025 Tex. Bus. 45 November 8, 2025 11th Div. Adrogué, J. Contract Contract termination notice, termination not subject to "strict compliance" standard applicable to option exercise. Substantial compliance with notice provisions sufficient. Specific performance denied as estopped. CRS Mechanical v. Norfolk Cold Storage 2025 Tex. Bus. 46 November 14, 2025 8th Div. Stagner, J. Construction Summary judgment granted against counterclaims for declaratory relief. Declarations either duplicated issues already joined or sought relief beyond the Court's jurisdiction. Crain v. Northern (Legal Malpractice) 2025 Tex. Bus. 49 December 17, 2025 8th Div. Bullard, J. Jurisdiction Legal malpractice and fractured malpractice-based claims dismissed without prejudice for lack of subject-matter jurisdiction. Such claims are not within the Court's authority. Hensarling v. Carmichael 2025 Tex. Bus. 50 December 18, 2025 4th Div. Sharp, J. Partnership Motion to dismiss under Rule 91a denied. Application to wind up a partnership under Section 11.314 of the Business Organizations Code provided sufficient factual allegations at this early stage. Slant Operating v. Octane Energy (Reciprocal Waiver) 2025 Tex. Bus. 53 December 22, 2025 8th Div. Bullard, J. Contract Summary judgment granted on competing motions concerning a reciprocal waiver agreement. No genuine issues of material fact existed regarding the definiteness of the agreement's essential terms or mutual assent. Preston Hollow Capital v. Truist Bank (Trust Code) 2025 Tex. Bus. 55 December 19, 2025 1st Div. Whitehill, J. Trust Trust Code does not bar punitive damages waivers. Waiver in one bond financing contract applies to claims based on a related contract in the same financing. Terminated trustee must protect former beneficiary's confidential information. Quintero v. Urban Infraconstruction (Inaugural Jury Trial) 2026 Tex. Bus. 3 January 26, 2026 1st Div. Bouressa, J. Trial Ruling after court-ordered Rule 166(g) briefing in the Business Court's first jury trial. Plaintiffs take nothing on certain claims; declaratory relief denied to both sides. Breach of contract, breach of fiduciary duty, and fraud claims proceed to jury trial. Crain v. Northern (Buy-Sell Option) 2026 Tex. Bus. 4 February 2, 2026 8th Div. Bullard, J. Contract Specific performance ordered under a mandatory Buy-Sell Option clause. Offeror entitled to specific performance after Offeree failed to respond to required notice. Attorneys' fees awarded. Preston Hollow Capital v. Truist Bank (Responsible Third Party) 2026 Tex. Bus. 5 February 2, 2026 1st Div. Whitehill, J. Procedure Addresses Civil Practice & Remedies Code Chapter 33's definition of "responsible third party" and the meaning of "the harm for which recovery of damages is sought." Alamo Title v. WFG National 2026 Tex. Bus. 6 February 3, 2026 4th Div. Sharp, J. Jurisdiction Removal notice pleading more than $5M in controversy satisfied jurisdictional threshold absent rebutting evidence. Aiding-and-abetting breach of fiduciary duty and IP-related allegations invoked Section 25A.004 jurisdictional clauses. American Airlines v. JetBlue Airways 2026 Tex. Bus. 7 February 19, 2026 8th Div. Bullard, J. Jurisdiction Defendant's special appearance denied. Court has specific personal jurisdiction over defendant. BNSF Railway v. Level 3 Communications 2026 Tex. Bus. 8 February 24, 2026 1st Div. Bouressa, J. Arbitration Arbitration award confirmed. Parties' contract and applicable law gave the arbitration panel authority to decide both substantive and procedural arbitrability questions. Yaun v. Battle & Sands Energy (HB 40 Retroactivity) 2026 Tex. Bus. 9 March 3, 2026 11th Div. Dorfman, J. Jurisdiction HB 40's $5M amount-in-controversy threshold applies retroactively to civil actions commenced on or after September 1, 2024. Motion to remand denied. Crain v. Northern (Derivative Standing) 2026 Tex. Bus. 11 March 11, 2026 8th Div. Bullard, J. Derivative Plea to the jurisdiction granted against derivative claims. Plaintiff lacked standing because he was no longer a member of the entities when he filed suit, per TBOC § 101.463. Galderma Laboratories v. Brenner 2026 Tex. Bus. 12 March 12, 2026 8th Div. Stagner, J. Non-Compete Temporary injunction granted against former employee's breach of non-compete agreement; scope of services reformed. Temporary injunction denied for customer non-solicit, worker non-solicit, confidentiality, and TUTSA claims. GoSecure v. CrowdStrike 2026 Tex. Bus. 13 March 13, 2026 3rd Div. Andrews, J. Jurisdiction CrowdStrike's special appearance granted. Court lacks general jurisdiction (CrowdStrike not "essentially at home" in Texas despite large office and sales). Specific jurisdiction lacking because claims don't arise out of or relate to Texas contacts. May v. INEOS USA Oil & Gas 2026 Tex. Bus. 14 March 27, 2026 4th Div. Sharp, J. Oil & Gas Partial summary judgment on oil & gas lease interpretation. Contracts conveyed fee simple determinable; earned-acreage provisions operate as special limitations on property interest; 30% reversionary back-in interest triggered at Payout. Dallas Sports Club v. DSE Hockey Arena (Mavericks v. Stars) 2026 Tex. Bus. 15 April 2, 2026 1st Div. Whitehill, J. Contract 90-page opinion resolving seven summary judgment motions in Dallas Mavericks v. Dallas Stars franchise/location dispute. Contract construction across four contracts among three parties; Mavericks' claims survive on contract-construction grounds. Daimler Truck Financial Services v. Vanguard National Trailer 2026 Tex. Bus. 16 April 8, 2026 8th Div. Bullard, J. Jurisdiction Certain defendants' special appearance granted. Plaintiff failed to establish that its claims against them arose out of their Texas conduct in this lien-priority dispute involving trailer manufacturer fraud allegations. Energy Founders Fund v. Daskevich (Advancement) 2026 Tex. Bus. 17 April 9, 2026 11th Div. Stagner, J. Indemnification Motion to compel advancement of legal fees against third-party defendant denied. Claims were not brought "by reason of" his service as a director as required by the third-party defendant's company agreement. Energy Founders Fund v. Daskevich (Drag-Along) 2026 Tex. Bus. 18 April 10, 2026 11th Div. Stagner, J. Governance Summary judgment granted. Company agreement required only majority board approval to transfer membership units; it did not also require consent of two directors. Enosis Investments v. Jensen 2026 Tex. Bus. 19 April 23, 2026 3rd Div. Andrews, J. LLC Rule 166(g) ruling on fiduciary duties. Pleadings did not support joint venture (no agreement to share profits/losses). A non-managing member of a manager-managed LLC generally does not owe fiduciary duties; corporate manager's fiduciary duty is not passed through to its individual officers/owners absent piercing. Last updated: May 12, 2026 Methodology and sources What's included This tracker includes substantive Texas Business Court opinions, those resolving merits issues, novel jurisdictional questions, or significant procedural matters with broader precedential value. Pure procedural rulings (routine motions to remand for pre-September 1, 2024 cases, after the foundational rulings established the rule; routine special-appearance grants; routine motions to compel) are generally omitted to keep the tracker focused on citable precedent. All entries verified against the official opinions list at txcourts.gov/businesscourt/opinions/ . Citations follow the court's preferred format (e.g., 2025 Tex. Bus. 9, paragraph numbers preferred over page numbers). Court structure The Texas Business Court has 11 divisions corresponding to the state's Administrative Judicial Regions. As of mid-2026, five divisions are operational: 1st (Dallas/McKinney), 3rd (Austin), 4th (San Antonio), 8th (Fort Worth), and 11th (Houston). The remaining divisions await legislative funding. Two judges are appointed per division to two-year terms. Maintained by Compiled by Kraus Law PLLC as a public reference. Corrections or additions welcome at hello@kraus.law . Patterns and observations What the first 19 months of Business Court opinions reveal. 5 Substantive opinions in 2024 (Sept-Dec), foundational jurisdictional rulings 26 In 2025, substantive merits decisions ramping up 16 In 2026 to date, bench trials, jury trials, complex merits decisions 5 Operational divisions (1st, 3rd, 4th, 8th, 11th), 6 remaining await funding Phase one: foundational jurisdictional rulings The first six months produced a clear pattern: cases filed before September 1, 2024 cannot be removed to the Business Court, regardless of party consent. This rule was established across multiple opinions (Energy Transfer v. Culberson Midstream, Synergy Global v. Hinduja, TEMA Oil and Gas v. ETC Field Services, Winans v. Berry) and continues to control. Section 8 of H.B. 19 was the dispositive provision. Phase two: "qualified transaction" jurisprudence Throughout 2025, opinions interpreted Section 25A.004, particularly the "qualified transaction" requirement, amount-in-controversy thresholds, and how internal-affairs claims fit. The Atlas IDF v. NexPoint Real Estate Partners opinion (May 2025) is the comprehensive reference on qualified-transaction analysis. HB 40 (effective September 1, 2025) lowered the threshold from $10M to $5M and was held retroactive for cases filed on or after September 1, 2024 (Yaun v. Battle & Sands). Phase three: substantive merits and trial activity Early 2026 marked a transition to substantive merits work. The first bench trial completed; the first jury trial (Quintero v. Urban Infraconstruction) began but ended in a directed verdict for the defendant after plaintiffs' case-in-chief. The Mavericks v. Stars opinion (April 2026), a 90-page contract construction tour-de-force, and the Marathon Oil v. Mercuria Energy force-majeure trilogy demonstrate the court producing the kind of detailed, reasoned commercial opinions Texas legislators intended. Notable opinion clusters Several cases produced multiple opinions over time as litigation progressed, Marathon Oil v. Mercuria Energy (4 opinions on force majeure, contract construction, liquidated damages); Primexx Energy v. Primexx Energy Corp. (5 opinions on partnership duties, drag-along rights, jurisdiction); Crain v. Northern (3 opinions on buy-sell specific performance, malpractice jurisdiction, derivative standing); Slant Operating v. Octane Energy (4 opinions). These threads provide useful longitudinal views of how the court handles complex cases. Author concentration Three judges have authored a disproportionate share of substantive opinions: Whitehill, J. (1st Div., Dallas), Bullard, J. (8th Div., Fort Worth), and Andrews, J. (3rd Div., Austin). Each has developed identifiable interpretive styles worth attorney attention when forum selection or removal decisions are being made. Related reading and listening Companion content on the Texas Business Court, SB 29 governance reforms, and the broader Texas business law framework. Insights · Long-Form Analysis The Texas Business Court, what it means for your contracts and governance. How the Business Court works, jurisdictional thresholds, what cases qualify, and how to draft forum-selection clauses to take advantage. Reference Tracker SB 29 Adopters. Public companies that have publicly disclosed adoption of SB 29 opt-in provisions, exclusive Texas forum, jury trial waivers, derivative thresholds. Reference Tracker Texas Redomesticators 2024-26. The 17 public and private companies that have redomesticated to Texas since January 2024, ExxonMobil, Dell, Tesla, Coinbase, and the 2026 wave. Practice · Texas Business Law The Texas Business Law Stack. Four statutes every Texas business owner should know, BOC, SB 29, TDPSA, and the Texas Business Court. Need to navigate Texas Business Court jurisdiction? Whether you're evaluating whether a dispute belongs in the Business Court, drafting forum-selection clauses, or considering how Business Court precedent affects your governance documents, the strategic questions are case-specific. The starting point is the conversation. Begin a Conversation --- ## Texas Redomesticators 2024-26, Tracker URL: https://kraus.law/trackers/texas-redomesticators-2024-26/ Reference Tracker · Texas Business Law Texas Redomesticators 2024-26. 17 public and private companies have redomesticated to Texas since January 2024, including ExxonMobil, Dell, Tesla, Coinbase, and the broader 2026 proxy season wave. If you read nothing else Texas has emerged as a leading alternative to Delaware for corporate domicile. Since January 2024, 17 public and private companies have redomesticated to Texas, including SpaceX (February 2024), Tesla (June 2024) following the Tornetta decision, Coinbase (November 2025), ExxonMobil (March 2026), and Dell (May 2026). The 2026 proxy season alone has already produced more Texas redomestications than all of 2025. Stated rationales concentrate on the Texas Business Court (operational September 2024), Texas's SB 29 statutory reforms (effective May 2025), and a desire for a statute-focused legal environment with reduced reliance on judicial interpretation. This tracker maintains the verified list with mechanism, origin jurisdiction, and stated rationale per entry. The data All 17 verified Texas redomestications since 2024. Click column headers to sort. Status reflects current state as of the last update. Company Ticker Origin Date Status Mechanism Stated Rationale SpaceX Private Delaware February 14, 2024 Completed Conversion Operational alignment with Texas headquarters; regulatory environment Tesla, Inc. TSLA Delaware June 13, 2024 Completed Conversion Response to Tornetta v. Musk chancery ruling voiding $56B compensation package Dillard's, Inc. DDS Delaware 2024 Completed Reincorporation Texas headquarters; statute-focused legal environment Zion Oil & Gas ZNOG Delaware 2024 Completed Reincorporation Statute-focused approach over case-law unpredictability EquipmentShare.com Inc. Private Delaware 2024 Completed Reincorporation Operational alignment with Texas business Coinbase Global, Inc. COIN Delaware November 2025 Completed Conversion Texas Business Court; efficiency, predictability, fairness; end of Delaware "monopoly on corporate law" Eightco Holdings Inc. OCTO Delaware December 1, 2025 Board Approved, Vote Pending Reincorporation Statute-focused approach; departure from Delaware judicial environment ExxonMobil Corp. XOM New Jersey March 10, 2026 Board Approved, Vote Pending Reincorporation Texas operational center; legal environment alignment Dell Technologies DELL Delaware May 12, 2026 Board Approved, Vote Pending Reincorporation Alignment with Texas roots (founded Austin 1984); business-friendly environment TTEC Holdings, Inc. TTEC Delaware 2026 proxy season Board Approved, Vote Pending Reincorporation Decade-long evaluation; concern over Delaware "hostility to controlled companies"; Texas Business Court ArcBest Corporation ARCB Delaware 2026 proxy season Board Approved, Vote Pending Reincorporation Statute-focused approach; reduced litigation exposure Texas Capital Bancshares, Inc. TCBI Delaware 2026 proxy season Board Approved, Vote Pending Reincorporation Alignment with Texas operational footprint and regulatory framework eXp World Holdings, Inc. EXPI Delaware 2026 proxy season Board Approved, Vote Pending Reincorporation Statute-focused approach; predictability for business decision-making Weatherford International plc WFRD Ireland 2026 proxy season Board Approved, Vote Pending Reincorporation Operational alignment with Texas energy sector base Dream Finders Homes DFM Delaware 2026 proxy season Board Approved, Vote Pending Reincorporation Texas Business Court preference; code-based statutory approach over Delaware case law Voyager Technologies VOYG Delaware 2026 proxy season Board Approved, Vote Pending Reincorporation Predictable legal environment for emerging-technology business Forward Industries, Inc. FWDI New York 2026 proxy season Board Approved, Vote Pending Reincorporation Move out of New York; Texas alignment Last updated: May 12, 2026 Methodology and sources What counts as a Texas redomestication This tracker includes any company, public or private, that has formally changed its jurisdiction of incorporation to Texas from any other jurisdiction (Delaware, New Jersey, New York, Ireland, etc.) since January 1, 2024. Both completed transactions and board-approved transactions pending shareholder vote are included; the Status column distinguishes them. Companies that have moved their headquarters but not their state of incorporation are excluded. Companies that proposed redomestication and withdrew before vote (e.g., MercadoLibre in the 2025 proxy season) are excluded but are noted in the patterns section. Companies that redomesticated to Nevada or other jurisdictions (e.g., Dropbox, Trade Desk, Tripadvisor, Pershing Square) are excluded, these are sometimes conflated with Texas redomestications in business press but are not part of this tracker. Verification sources Each entry is verified against the company's own SEC filings (proxy statements, 8-K filings, certificates of conversion) where available; news reporting at the time of announcement; and aggregator coverage from Business Law Prof Blog, Glass Lewis, Wilson Sonsini, and Mayer Brown reincorporation analysis. Where 2024 dates are imprecise, the entry is marked as "2024" without a specific date. This tracker is maintained by Kraus Law PLLC as a public reference work. Corrections or additions are welcomed at hello@kraus.law . Patterns and observations What the data reveals about the redomestication trend through May 2026. 5 Texas redomestications in 2024, including SpaceX, Tesla, Dillard's 2 In 2025, led by Coinbase Global in November 10 In 2026 to date, ExxonMobil, Dell, and the broader proxy season wave 14 Originated in Delaware, the dominant source jurisdiction Origin jurisdiction concentration Delaware accounts for 14 of 17 redomestications in this tracker, roughly 82% of total movement to Texas. The remaining entries originate from New Jersey (ExxonMobil, its first reincorporation since the 1800s), New York (Forward Industries), and Ireland (Weatherford International). This concentration reflects Delaware's market share of incorporations more than any unique Delaware push factor; companies leaving non-Delaware jurisdictions for Texas remain relatively rare. Acceleration in 2026 The 2026 proxy season has already exceeded full-year 2025 Texas redomestications. As of mid-May 2026, ten companies have announced Texas redomestication in the current proxy season alone, ExxonMobil, Dell, TTEC, ArcBest, Texas Capital Bancshares, eXp World Holdings, Weatherford, Dream Finders Homes, Voyager Technologies, and Forward Industries. The pace suggests a step-change rather than continued steady accumulation. Stated rationales cluster around three themes Companies' stated rationales for choosing Texas concentrate on (1) the Texas Business Court, specialized commercial jurisdiction operational since September 2024; (2) Texas's SB 29 statutory reforms, effective May 2025, codifying the business judgment rule under TBOC § 21.419(c), introducing a 3% derivative threshold under § 21.552(a)(3), and tightening books-and-records procedures; and (3) general preference for a statute-focused approach over Delaware's case-law-driven framework, often framed as reduced reliance on judicial interpretation. The Tornetta v. Musk chancery ruling (January 2024) is cited explicitly or implicitly in most rationales. The TTEC proxy is unusually candid about Delaware's "apparent hostility to controlled companies." Several 2026 proxies follow similar framing. Notable absences Federally-regulated banks (other than Texas Capital Bancshares, which operates primarily in Texas) and insurance companies are conspicuously absent from the Texas-redomestication list. Regulatory frictions specific to banking and insurance, particularly state-level domicile requirements for charter or licensure, make Delaware redomestication harder for these companies regardless of jurisdictional preference. The trend may not extend uniformly to these regulated sectors. The Texas vs Nevada question Nevada has captured more total redomestications than Texas during this period, approximately 35% of Dexit reincorporations in 2025 went to Nevada, compared to 40% to Texas in 2025 by some counts. Many companies frequently confused with Texas redomestications went to Nevada: Dropbox (March 2025), Trade Desk (November 2024), Tripadvisor (February 2024), Pershing Square Capital (announced February 2025), and Datadog (2026). Texas's appeal concentrates on companies with substantial Texas operational presence; Nevada's appeal is broader and less geographically anchored. Related reading and listening Companion content on the redomestication trend, the legal framework driving it, and the Texas Business Court environment receiving these companies. Insights · Securities · Cross-Border TXSE foreign private issuer listings, when the new alternative makes sense. Rule 16.312 alternative listing pathway for foreign private issuers on the new Texas Stock Exchange, the four financial tests, distribution standards, home country practice accommodation, and where TXSE fits into the broader Texas redomestication wave. Insights · Securities SEC semi-annual reporting proposal, what would change and what would not. The May 5, 2026 SEC proposal to allow optional semi-annual reporting via Form 10-S, the cross-border efficiency case for dual-listed companies brought into U.S. reporting through Texas redomestication, and the strategic calculus for domestic filers. Insights · Long-Form Analysis Texas redomestication from Delaware, the push, the pull, and the patterns. The Five Things framework for evaluating Delaware-to-Texas redomestication: what makes a candidate, what the mechanisms look like, what to expect from the timeline, and what to plan for at the board level. Insights · Governance SB 29 governance documents, what changed and what to update. Texas's May 2025 governance reform package, the codified business judgment rule, the 3% derivative threshold, and what Texas entities should be updating in their charter and operating agreements. Practice · Governance The Four Pillars of Texas Governance Post-SB 29. Director independence, information rights, fiduciary duty calibration, and derivative litigation strategy under the new Texas framework, with a side-by-side comparison to Delaware governance. Practice · Texas Business Law The Texas Business Law Stack. Four statutes every Texas business owner should know, the Business Organizations Code, SB 29, TDPSA, and the Texas Business Court, and how the layers stack together. Considering Texas for your entity? Whether you're evaluating redomestication, structuring a fresh formation in Texas, or updating governance documents for the post-SB 29 framework, the strategic questions are entity-specific. The starting point is the conversation. Begin a Conversation --- ## What Is Your Business Worth? How Valuation Works URL: https://kraus.law/what-is-your-business-worth/ Valuation What is your business actually worth? Every owner asks eventually — usually with a reason attached. Arriving at a number is the easy part. Understanding what it means, and what to do about it before you sell, is the work. The question usually arrives with a reason: a buyer made contact, a partner wants out, retirement stopped being abstract, an advisor asked for a number. Here is the part most people get backward. There are three standard ways to put a value on a business, and you can get a defensible estimate in an afternoon. The hard part — the part that decides how much you actually walk away with — comes after the number. The three ways value gets measured Professional valuation rests on three approaches. A good estimate considers all three and reconciles them. The income approach looks at what the business earns and what those earnings are worth to a buyer. Take the company's normalized profit, apply a multiple that reflects the industry and the risk, and you have a value. A business throwing off $400,000 in owner earnings in an industry that trades at three times earnings is worth roughly $1.2 million on this basis. Most operating companies are valued primarily this way. The market approach asks what similar businesses have actually sold for. It works the way a real estate agent prices a house — by comparable sales. Its strength is that it reflects real transactions rather than theory. Its weakness is that genuinely comparable private sales are hard to find, so the comparison is rarely clean. The asset approach totals what the business owns and subtracts what it owes. For a company whose value lives in its earnings and relationships, this understates the truth. For a holding company or one in distress, it can be the most honest measure. No single approach is right. The judgment is in weighing them for your specific company. The four numbers a serious read produces A surface estimate gives you one figure. A proper read gives you four, because what it's worth depends entirely on what is being sold and why. Asset sale value is what most owner-operated businesses actually change hands for. The buyer takes the inventory, equipment, and intangibles — the customer base, the goodwill — and you keep the cash and receivables and clear the debt. This is the number that matters in a typical small-business sale. Equity value is what your ownership stake is worth: the asset value plus your liquid financial assets, minus your liabilities. This is the figure that governs a partner buyout, an estate filing, or a divorce. Enterprise value is the value of the whole capital structure, equity and debt together. It is the language of middle-market M&A, because it lets a buyer compare companies regardless of how each one is financed. Liquidation value is the floor — what the assets would bring in a forced, near-immediate sale. You hope never to need it, but knowing it tells you the downside. Most owners have heard one number and assumed it was the number. It rarely is. Which figure is relevant depends on the transaction in front of you, and choosing wrong is how owners end up negotiating against the wrong target. A worked example Suppose a full-service restaurant does $3 million in revenue and roughly $650,000 in owner earnings, with modest debt and ordinary working capital. Run honestly, the asset and equity figures come out close together — call it the low $2 millions — with a liquidation floor far below that, in the tens of thousands, because used restaurant equipment sells for a fraction of its worth to a going concern. That spread is the lesson. The same business is worth around $2 million as an operating enterprise and a small fraction of that broken up for parts. Value lives in the business working — in its earnings and its relationships — not in its furniture. Most of what you've built is intangible, and intangible value is exactly what careless preparation puts at risk. Why the number alone misleads owners A valuation tells you where you stand today. It does not tell you where you could stand at sale, and those are different numbers. The distance between them is the value gap , and it is almost always the most consequential figure in the whole exercise. Customer concentration, dependence on the owner, thin or informal records, a lease that does not transfer cleanly — each one quietly discounts the price a buyer will pay, and each one is fixable with enough runway. Owners who learn their value early have time to close the gap. Owners who wait until a buyer is at the table negotiate from wherever the business happens to be. This is why the estimate is a starting point, not an answer. The number opens the conversation that matters: given where you are, what moves the figure, and how long do you have to make those moves. In a full sale, this is the first of six phases — the decision-and-preparation work that happens 12 to 18 months before close. I've mapped the whole process in the owner's roadmap to selling a business in Texas . What you need to get an estimate Less than people expect. At minimum, a recent business tax return. To sharpen the estimate, three years of returns, three years of financial statements plus interim figures, and a summary of what each owner is actually paid. If you can hand those to your accountant, you can produce a credible read. Completing a valuation costs you nothing and is faster than you'd expect: the tool walks you through it in about ten minutes, on the same engine professional advisors and institutions rely on, producing all four figures and operating measures benchmarked against your industry. What you won't get is the raw output on screen — I review every valuation myself and go through it with you, so the numbers arrive with context. One honest note. This is an indication of value, not a certified appraisal . It is the right instrument for planning, for understanding your position, and for deciding whether and when to move. It is not a formal appraisal for tax filing or litigation. When you need that, I will say so and arrange it. Get your business valuation → Talk through your situation Common questions How much is my business worth as a multiple of revenue or profit? It varies by industry and by the specific company. Owner-earnings multiples for small operating businesses commonly fall in the low single digits; revenue multiples are usually well under one for service businesses. The multiple is set by risk and growth, which is why two companies with identical earnings can be worth meaningfully different amounts. Is an online valuation accurate enough to sell on? It's accurate enough to plan on and to understand your position. A serious estimate, run on honest inputs, gives you a reliable indication of value. The final sale price is set at the table, by a buyer who has seen the financials and negotiated the terms. What's the difference between an indication of value and a certified appraisal? An indication of value is a planning estimate. A certified appraisal is a formal opinion prepared to a professional standard for tax, litigation, or similar use. Most owners need the first far more often than the second, and confusing the two is a common and expensive mistake. Here's how to tell which you need. When should I get a valuation if I'm not selling yet? Earlier than feels necessary. Knowing your value years ahead of a transition gives you time to close the value gap, which is where the return on this work actually comes from. Does getting an estimate obligate me to anything? No. The estimate is a complimentary first read. What you do with it is your decision. Understanding what your company is worth is the first move in any transition. Start a conversation → Get your business valuation --- ## Why Owners Get a Business Valuation URL: https://kraus.law/why-owners-get-a-valuation/ Valuation There are a dozen reasons to know what your business is worth. You probably have one. A valuation isn't something you do because an advisor told you to. It answers a specific question you're already asking — about a sale, a partner, your estate, or just whether the years have added up to what you think. Tell me which one is yours. I'm thinking about selling now, or in the next few years I'm buying a business or making an offer A partner is coming in or going out buy-in or buyout I'm passing it to family or my team succession Estate or gift planning moving wealth deliberately Insurance and protection key-person, buy-sell coverage I'm raising capital investors or a lender Honestly, I'm just curious no agenda The number that matters: asset sale value Selling the business Then the figure you want isn't the one in your head — it's what a buyer will actually pay. For most owner-operated companies that's the asset sale value : the business delivered free of debt, you keeping the cash and receivables. Timing is the whole game. Get a read 12 to 18 months early and you have time to fix what quietly discounts the price — customer concentration, owner dependence, thin records. Wait until a buyer is at the table and you negotiate from wherever the business happens to be that quarter. I've mapped the full process in the owner's roadmap to selling . Get your business valuation Or just talk to Chuck The number that matters: an independent read Buying a business You want to pay what it's worth, not what the seller hopes. An independent valuation before you sign a letter of intent gives you a basis to test the asking price — and to challenge the add-backs a seller uses to inflate earnings. The earnings figure a multiple gets applied to is a negotiated number. Knowing how to read it is the difference between a fair deal and an expensive one. Talk through the deal Or just talk to Chuck The number that matters: equity value A partner buying in or out Partner transitions get expensive when there's no agreed way to value the stake. The figure here is equity value — what an ownership interest is actually worth once you account for the company's cash and its debts. The best time to settle the method is before anyone wants out, in a buy-sell agreement. The second-best time is now. If a partner is already heading for the door, here's what that process looks like . Talk it through Or just talk to Chuck The number that matters: equity value Passing it to family or your team A handoff still has a value — for fairness among heirs, for a defensible price to the next owner, and for the gift- and estate-tax planning that usually rides alongside it. Families assume a transfer inside the family doesn't need a number. It does. The absence of one is what turns a succession into a dispute. Plan the handoff Or just talk to Chuck Note: planning vs. a tax filing are different Estate and gift planning For planning — deciding what to move and when — an indication of value orients you and costs you almost nothing. For an actual gift- or estate-tax filing , the IRS expects a qualified appraisal, which is a different and more formal document. The mistake owners make is paying for the formal one before they need it, or filing with an estimate that won't hold. Here's how to tell which you need. Get oriented first Or just talk to Chuck The number that matters: current value Insurance and protection If you carry key-person or buy-sell insurance, the coverage should track the real value of the business. Most owners set a figure once and never revisit it — which means they're either over-paying for coverage they don't need or under-protected against the loss they're insuring. A current valuation tells you which. Check your number Or just talk to Chuck The number that matters: enterprise value Raising capital Investors and lenders price the whole enterprise — equity and debt together. A current, defensible valuation sets the terms of that conversation before someone else sets them for you. Walking into a raise without your own number means negotiating off theirs. Set your terms Or just talk to Chuck No agenda required Just curious Fair enough. It's the largest asset most owners have and the one they check on least — curiosity is a perfectly good reason. Start with the free estimate. No one calls you, nothing is owed. If the number surprises you, in either direction, that's usually the moment a real conversation is worth having. See your estimate Or just talk to Chuck The common thread Every one of those situations turns on the same fact: your business is almost certainly the largest asset you own, and the one you check on least. You know your home's value within a few thousand dollars. Most owners couldn't put a defensible number on the company that funds their entire life. That's the gap worth closing. Not because a number is magic, but because every decision above — when to sell, what to accept, how to plan — gets made better when you're working from a real figure instead of a hopeful one. Common questions Will a valuation tell me what I can sell for? It tells you what the business is worth on a defensible basis, which is where the conversation starts. The final price is set at the table, by a buyer who has seen the financials. The valuation is what keeps that negotiation honest. How often should I know my number? If a transition is years out, once a year is plenty — enough to watch the trend and catch problems early. If you're inside two years of a sale, you want it current and you want a plan to move it. Does getting an estimate commit me to anything? No. The first read is complimentary. No one calls you, nothing is owed, and what you do with the number is your decision. Whatever the reason, the first step is the same: a clear, honest read on what the company is worth. Get your business valuation Talk it through with Chuck ---