Little Known Facts: The Zero Percent General Partner

One often sees general partnerships in which the general partner owns 1% or even 0.1% of the limited partnership.  But may the general partner of a Texas limited partnership own 0% of the limited partnership?

Yes.  Section 153.151(d) of the Texas Business Organizations Code, adopted effective 2006, provides that:  “A written partnership agreement may provide that a person may be admitted as a general partner in a limited partnership, including as the sole general partner, without acquiring a partnership interest in the limited partnership.” 

Every general partnership must have at least one general partner.  The general partner is generally responsible for managing the limited partnership and faces unlimited liability for the debts of the limited partnership if the limited partnership is unable to pay its debts.

So why would a person agree to serve as a 0% general partner – getting all of the downside but none of the upside of the limited partnership?  Typically a 0% general partner is also an affiliate of one or more of the limited partners who do enjoy part or all of the upside of the partnership. 

Foreign Entities Transacting Business in Texas

Foreign entities transacting business in Texas must register with the Texas Secretary of State's office.  For purposes of the Texas Business Organizations Code (TBOC), a "foreign" entity is any entity formed under the laws of another jurisdiction, such as a Delaware limited liability company or a Nevada corporation.

But what does it mean to "transact business" in Texas?  Unfortunately, the TBOC does not define that term.  Section 9.251 of the TBOC offers some assistance by providing the following non-exclusive list of activities which do NOT, by themselves, constitute transacting business in Texas:

(1)  maintaining or defending an action or suit or an administrative or arbitration proceeding, or effecting the settlement of: (A)  such an action, suit, or proceeding; or (B)  a claim or dispute to which the entity is a party;
(2)  holding a meeting of the entity's managerial officials, owners, or members or carrying on another activity concerning the entity's internal affairs;
(3)  maintaining a bank account;
(4)  maintaining an office or agency for: (A)  transferring, exchanging, or registering securities the entity issues; or (B)  appointing or maintaining a trustee or depositary related to the entity's securities;
(5)  voting the interest of an entity the foreign entity has acquired;
(6)  effecting a sale through an independent contractor;
(7)  creating, as borrower or lender, or acquiring indebtedness or a mortgage or other security interest in real or personal property;
(8)  securing or collecting a debt due the entity or enforcing a right in property that secures a debt due the entity;
(9)  transacting business in interstate commerce;
(10)  conducting an isolated transaction that: (A)  is completed within a period of 30 days; and (B)  is not in the course of a number of repeated, similar transactions;
(11)  in a case that does not involve an activity that would constitute the transaction of business in this state if the activity were one of a foreign entity acting in its own right: (A) exercising a power of executor or administrator of the estate of a nonresident decedent under ancillary letters issued by a court of this state; or (B) exercising a power of a trustee under the will of a nonresident decedent, or under a trust created by one or more nonresidents of this state, or by one or more foreign entities;
(12)  regarding a debt secured by a mortgage or lien on real or personal property in this state: (A) acquiring the debt in a transaction outside this state or in interstate commerce; (B) collecting or adjusting a principal or interest payment on the debt; (C) enforcing or adjusting a right or property securing the debt; (D) taking an action necessary to preserve and protect the interest of the mortgagee in the security; or (E) engaging in any combination of transactions described by this subdivision;
(13)  investing in or acquiring, in a transaction outside of this state, a royalty or other nonoperating mineral interest;
(14)  executing a division order, contract of sale, or other instrument incidental to ownership of a nonoperating mineral interest; or
(15)  owning, without more, real or personal property in this state.

The Texas Secretary of State's website provides further information on this topic here: http://www.sos.state.tx.us/corp/foreign_outofstate.shtml

Drafting Tip: Indemnified Affiliates or Third Party Beneficiairies?

Can a party be an indemnified affiliate of a contracting party but not a third party beneficiary of that contract?  A recent New York case (Diamond Castle Partners IV PRC, L.P. v. IAC/InterActiveCorp, 2011 N.Y. App. Div. LEXIS 1542 (2011)) highlights an interesting legal drafting issue that comes up often in deal documents. 

Diamond Castle is a private equity fund that formed an acquisition vehicle, Panther, to acquire the equity of another company, PRC, for $286.5 million.  Immediately after the closing, Panther was merged into PRC.  The purchase agreement included two arguably contradictory statements:

(1) The seller, IAC, would indemnify Panther and all of its affiliates for any breaches of the purchase agreement; and

(2) There are no third party beneficiaries of the purchase agreement. 

So when Diamond Castle, an affiliate of Panther, sought indemnification for an alleged breach under the purchase agreement, IAC argued that statement (2) above controlled.  Obviously, Diamond Castle argued that statement (1) controlled.

The New York court agreed with Diamond Castle, reasoning that the only logical reading of the agreement was that affiliates of Panther were intended to be indemnified and that such indemnified parties were therefore not "third parties" for the purposes of statement (2).

Regardless of the results in this particular case, drafters of purchase agreements can remove any ambiguity on this point by more careful drafting.  When drafting agreements, consider including a carve-out to the "no third party beneficiary" provision to specifically except third parties indemnified under other provisions of the agreement.

Special thanks to Jonathan P. Gill, Michael C. Hefter, and Kelly Koscuiszka of Bracewell & Giuliani LLP who brought the Diamond Castle case to my attention.

Little Known Facts: Ownership Certificate in Bearer Form

May a Texas entity issue stock or other ownership interest in bearer form? 

No.  Section 3.202(f), which prohibits ownership certificates in bearer form, was added to the Texas Business Organization Code (TBOC) September 2009.  "Bearer form" means that the certificates have no registered owners - they are owned by any party who "bears" the certificate.  This provision to the TBOC was added in part because law enforcement officials objected to parties being able to disguise the actual ownership of business entities through the use of bearer ownership.  Bearer certificates might also make theft of certificates easier.  For example, although it involved debt rather than equity, it was the theft of bearer bonds that was at the heart of the plot of the movie Die Hard.  Had the bonds been issued in registered form rather than bearer form, Bruce Willis's character might have had a much less eventful Christmas holiday.