Texas Business Law Glossary

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Before Firing an Employee

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.

"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.

Companion article: Before Firing an Employee

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.

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).

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The CEO's Guide to Getting Sued

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.

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.

Companion article: Contract Disputes in Texas

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Before Firing an Employee in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

"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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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" 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.

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.

Companion article: Business Divorces in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Selling Your Business

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.

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.

Companion article: Starting a Business in Texas

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.

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 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.

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.

Companion article: Business Succession Planning in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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).

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.

Companion article: Raising Capital in Texas

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.

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.

Companion article: Starting a Business in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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).

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Collecting a Judgment in Texas

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.

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.

Companion article: Contract Disputes in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Raising Capital in Texas

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.

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.

Companion article: Licensing Your IP in Texas

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.

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.

Companion article: Starting a Business in Texas

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.

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).

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Before Firing an Employee

"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.

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.

Companion article: Collecting a Judgment in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Commercial Leases in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Starting a Business in Texas

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.

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.

Companion article: Non-Competes in Texas

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.

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.

Companion article: Contract Disputes in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Business Succession Planning in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Patents vs. Trademarks vs. Trade Secrets

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.

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.

Companion article: Starting a Business in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Raising Capital in Texas

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.

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.

Companion article: Data Breach Response

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Contract Disputes in Texas

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).

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Buying Commercial Property 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.

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.

Companion article: Buying Commercial Property in Texas

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).

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The CEO's Guide to Getting Sued

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.

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.

Companion article: Business Divorces in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: The CEO's Guide to Getting Sued

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.

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.

Companion article: Raising Capital in Texas

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Before Firing an Employee

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Before Firing an Employee in Texas

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.

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.

Companion article: Before Firing an Employee

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.

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.

Companion article: Licensing Your IP in Texas

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.

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).

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Business Succession Planning in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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).

Companion article: Wage and Hour Compliance in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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).

Companion article: Wage and Hour Compliance in Texas

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).

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.

Companion article: Before Firing an Employee

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Before Firing an Employee in Texas

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.

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.

Companion article: Collecting a Judgment in Texas

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.

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.

Companion article: Contract Disputes 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.

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.

Companion article: Operating Across State Lines

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.

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.

Companion article: Before You Fire That Employee, Texas Pre-Termination Checklist

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Before Firing an Employee

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

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.

Companion article: AI and the Law for Texas Businesses

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.

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.

Companion article: Commercial Leases in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Business Divorces in Texas

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.

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

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Wage and Hour Compliance in Texas

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.

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.

Companion article: Non-Competes in Texas

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.

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).

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Licensing Your IP in Texas

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).

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.

Companion article: The Board Meeting Nobody Prepared For

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.

§ 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.

Companion article: Business Divorces in Texas

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Licensing Your IP in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Starting a Business in Texas

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.

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.

Companion article: Contract Disputes in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Starting a Business in Texas

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).

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: What a Fractional GC Does

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.

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.

Companion article: Selling Your Business in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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.

Companion article: Contract Disputes in Texas

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.

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.

Companion article: Starting a Business in Texas

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.

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.

Companion article: Raising Capital in Texas

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.

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.

Companion article: Business Succession Planning in Texas

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.

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.

Companion article: Business Succession Planning in Texas

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.

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.

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.

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.

Companion article: The Board Meeting Nobody Prepared For

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.

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.

Companion article: The CEO's Guide to Getting Sued

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.

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.

Companion article: Selling Your Business

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.

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.

Companion article: Non-Competes in Texas

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.

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.

Companion article: Buying Commercial Property in Texas

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.

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).

Companion article: Non-Competes in Texas