Texas has recently taken a significant step in reshaping how companies can govern themselves. With the passage of SB 29, the Texas Business Organizations Code now permits certain business entities to expand, restrict, or eliminate fiduciary duties owed by managers, members, officers, and other key decision-makers. For many companies, particularly LLCs and limited partnerships, this change introduces a new level of contractual freedom that can significantly affect internal relationships and day-to-day governance.
For business owners navigating this new landscape, working with experienced counsel is essential. Our business transaction lawyers at MehaffyWeber have closely followed these developments. We are prepared to help companies evaluate what these changes mean and whether adopting duty modifications makes sense for their operations.
Understanding Fiduciary Duties
Traditionally, fiduciary duties exist to ensure that those who control or manage a business act in the company’s and its owners’ interests. These duties commonly include:
- Duty of loyalty: To act in the best interest of the company, rather than for personal gain
- Duty of care: To make thoughtful and informed decisions
- Duty of obedience and good faith: To comply with governing documents and the law
In many states, these duties cannot be eliminated. They can only be adjusted to a limited extent. However, Texas has now joined a minority of jurisdictions that allow significantly broader contractual flexibility.
What SB 29 Changes
SB 29 amends various provisions of the Texas Business Organizations Code to implement several essential governance reforms. The most notable change for company owners is:
Permission to Expand, Restrict, or Eliminate Fiduciary Duties
The governing documents for LLCs and limited partnerships can now expressly modify or remove fiduciary duties owed between managers, members, general partners, and other internal stakeholders. This means:
- Companies may choose not to impose a duty of loyalty or duty of care.
- Parties may agree to conduct business under a governance model that relies more heavily on contract and negotiation rather than on traditional duties enforced by courts.
However, this ability is not automatic. The governing documents must specifically state which duties are modified or removed. If there is nothing specific, standard fiduciary duties apply.
Codification of a Business-Judgment Rule Standard
SB 29 also strengthens protections for decision-makers by more clearly defining a business-judgment rule, which gives executives and managers the benefit of the doubt when business decisions result in unfavorable outcomes. This helps reduce the threat of lawsuits based on hindsight, so long as decisions are made in good faith, made on an informed basis, and not unlawful or fraudulent.
Additional Governance Flexibility
The amendment also provides expanded freedom in:
- Setting internal dispute-resolution procedures
- Designating venue and forum restrictions
- Limiting rights to inspect company records
- Raising thresholds for derivative actions initiated by minority owners
Taken together, the legislation provides companies with more tools to tailor governance to their needs.
What This Means for Company Owners
The ability to eliminate fiduciary duties is a powerful tool. However, it can be beneficial or risky depending on how it is used.
Potential Advantages
Benefits for company owners can include:
- Reduced litigation risk: With fewer fiduciary obligations, there are fewer grounds for internal lawsuits.
- Flexibility in management style: Family-run or closely-held companies may prefer trust-based or contract-defined roles.
- Clarity in transactions: Parties can agree upfront on how to handle conflicts of interest and strategic decisions.
- Attractiveness to certain investors or joint ventures: Some investors prefer highly customized contractual governance structures.
This law is a welcome change for complex joint ventures or heavily negotiated private equity deals.
Potential Risks
Risks for company owners can include:
- Reduced protection for minority owners: Without fiduciary safeguards, controlling owners may have more power to act in their own interests.
- Perception concerns among lenders or institutional investors: Some stakeholders may view the absence of fiduciary duties as a governance red flag.
- Possibility of internal conflict without default standards: The contract must clearly specify outcomes when duties are eliminated, but disagreements arise.
This new law removes the safety net, placing the entire burden of self-protection on the governing documents.
This Change is Not a Free Pass
Liability is not entirely wiped away, even when fiduciary duties are restricted or eliminated. Companies and their managers can still face claims for:
- Fraud
- Intentional misconduct
- Criminal acts
- Knowing violations of law
- Conduct expressly prohibited by the company agreement
In other words, you can relax fiduciary obligations, but you cannot contract out of legality or good faith altogether.
Practical Steps for Business Owners
If your business is organized as an LLC or LP, or is considering converting, you may want to:
- Review your current governing documents: Determine whether fiduciary duties are already defined, limited, or could be.
- Evaluate whether a duty modification aligns with your ownership structure: Closely held companies may benefit, but companies with diverse investor groups may not.
- Amend the operating or partnership agreement if needed: Amendments should be clear, precise, and consistent with related contractual obligations.
- Consider how lenders, investors, and partners may view the change: Sometimes, keeping duties in place builds trust and stability.
- Consult a business transaction attorney before implementing changes: Precision in drafting is critical, as ambiguous duty modifications often invite litigation rather than prevent it.
This change represents a double-edged sword for Texas company owners. It offers unprecedented flexibility and contractual certainty for sophisticated partners, but it also creates potentially devastating risks for minority owners and investors who are not paying close attention.
Safeguard Your Company with the Help of MehaffyWeber
The amendment to the Texas Business Organizations Code provides businesses with significant new flexibility in defining their internal governance. While this may help reduce disputes and streamline decision-making, you should not use the ability to eliminate fiduciary duties lightly. Your company must assess whether modifying these duties supports its goals, ownership dynamics, and long-term strategy.
If your business is considering whether to take advantage of these new provisions, our business transaction lawyers at MehaffyWeber can provide guidance tailored to your company’s ownership structure, industry considerations, and strategic priorities.