For guidance on business entities in Texas and Delaware, look no further than Byron Egan, who literally wrote the book on choice of entity. The third edition of his treatise, EGAN ON ENTITIES: Corporations, Partnerships and Limited Liability Companies in Texas, will be available through LexisNexis in November, and while the last update was released just two years ago, practically every page was updated to include changes in legislation and court decisions. In this Fast Takes episode, Byron addresses some of those updates, including one of Texas’ favorite company’s recent board liability, and how the decision of where you choose to incorporate makes a significant difference in liability exposure. Byron also discusses how corporate statutes allowed for reasonable actions by the corporations even under the pressures of the pandemic and the social justice issues seen in 2020.
Greg Lambert: Hi, everyone. I’m Greg Lambert, it’s October 29th, and this is Jackson Walker Fast Takes. Byron Egan is a Jackson Walker partner in our Corporate & Securities group in Dallas, and has literally written the book on business entities in Texas and Delaware. This month, Byron released the third edition of EGAN ON ENTITIES, and we wanted to bring him on the podcast to talk more about the book.
Hey, Byron, thanks for taking the time to talk with me.
Byron Egan: Well, thank you.
Greg Lambert: Now, you have over 40 years of experience guiding clients through the formation and governance of their business entities. Before we get too far along, though, would you mind just taking a moment to define what you mean by “entities”?
Byron Egan: An entity can be a corporation—general partnership is the oldest entity. So, we have corporations, we have partnerships, and partnerships come in varieties. You have general partnership, where everybody’s jointly and severally liable; limited partnerships; and then we have a limited liability partnership. And then we have the limited liability company. And we’re making LLCs at a nine-to-one ratio over corporations in Texas. The Delaware ratio is a bit less. Each of these entities has its own characteristics – they have the way they’re taxed, the way they’re governed, their history, their purpose.
Greg Lambert: So, your third edition of the EGAN ON ENTITIES just came out. What are some of the changes that readers should look for in this new edition?
Byron Egan: The legislators in Texas and in Delaware meet regularly. In Texas, they meet every two years, and in Delaware, they meet every year. The result is over a two year span, there has been a substantial change in the laws in Texas and in Delaware—the statute laws. The courts have been meeting in this period and deciding cases, so there are new cases that interpret the statutes and the common law. There is a lot in the book that has to change to keep up to date. We also have changes in tax laws and regulations. So, the result is that practically every page in the book changes. And the net result is we have approximately 900 pages of book, and about 800 of those changed from before and another 100 are new. So, there’s a lot of stuff in there.
Greg Lambert: Byron, as you and I were prepping for this interview, one of the new cases that you mentioned in the third edition is one that if you live in Texas, you probably heard about, and that is the Blue Bell ice cream company and their recent troubles. Do you mind sharing that story with us?
Byron Egan: Well, some Texans decided that they wanted to be a Delaware corporation. And so we’re talking about a closely held business in Brenham, Texas, and they make ice cream, Blue Bell ice cream that we all know and love. They had a listeria outbreak and eight people got sick and three of them died, so that was a disaster for the company. They had to recall their products, close down their plants. The result was that they had to seek out emergency financing, and as we all know, emergency financing is expensive. Shareholders were upset, derivative action was filed, and they alleged that the directors have not done what they were supposed to do in monitoring these food safety issues and allowed the outbreak to occur. So, the Chancery Court said the board had a system going on, management was monitoring it, but the Supreme Court said no, the directors individually are supposed to be involved in monitoring critical missions system risks for the company—in the case of an ice cream company, it’s food safety. So, liability was found by the Delaware Supreme Court. There are several other cases just like that that have come down recently in Delaware. Now, if we were in Texas, we have a very strong business judgment rule, and the result would have been different. But it’s what it is, and that’s a warning about being in Delaware.
Greg Lambert: So, where you incorporate really matters?
Byron Egan: It does.
Greg Lambert: I would be remiss since it’s still 2020—have there been any effects that the pandemic or that the social justice movement has had on governance issues for entities?
Byron Egan: Yes and no. Our statutes were adequate to deal with the need for socially distant meetings. We have the ability in both Texas and Delaware to have Zoom meetings of shareholders, even large public corporations. You can have telephone meetings, written consent actions. So, the statute base was there the courts will let you do it. But you get into the practicalities of it, the logistics of it, and then you get into the substance of it. And the duties that I write about in the book, duty of care, a director have a duty to exercise reasonably prudent individuals care, they have a duty of loyalty to act in the best interest of the business. But in the issues that come up, the way the board responds will differ. So with COVID-19, we first had the lock down, and that caused a lot of financial hurt within the businesses, you had supply chain disruption, you had financing issues, then we had the Floyd case and the social disruption that followed that, and so the result is the board is under a lot of pressure to respond appropriately to these circumstances that are facing the corporation. Your basic focus is on what’s financially good for the shareholders, but if you deal with human beings, with employees, with customers, you’ve got to deal with the social issues. And boards are being increasingly called on to do that. In a way, that helps shareholder values because keeping the people happy is critical – mission critical.
Greg Lambert: Well, Byron is always a pleasure talking with you. Thanks for taking the time to update us on your new book.
Byron Egan: Thank you.
The music is by Eve Searls.
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