Untitled Texas Attorney General Opinion

The Attorney General of Texas
August 16, 1978
JOHN L. HILL
Attorney General
Honorable Richard D. Latham Opinion No. H- 12 2 9
Securities Commissioner
State Securities Board Re: Voting rights in limited
709 Lyndon Baines Johnson Building partnerships.
Austin, Texas 787ll
Dear Mr. Latham:
YOU have asked a number of questions regarding the Texas Uniform
Limited Partnership Act, article 6132a, V.T.C.S. You state that the North
American Securities Administrators Association (hereinafter NASAA), of
which the State Securities Board is a member, has promulgated guidelines for
registration of certain securities. Recently, NASAA amended its guidelines
for the registration of oil and gas programs to revise the voting rights
accorded to limited partner participants in such programs. The amendment
provides:
Section VHF. Voting Rights of Limited Partners
To the extent the law of the state of organization is
not inconsistent, the limited partnership agreement
must provide that holders of a majority of the then
outstanding units may, without the necessity for
concurrence by the general partner, vote to (a) amend
the limited partnership agreement or charter docu-
ment, (b) dissolve the program, (c) remove the general
partner and elect a new general partner, (d) elect a
new general partner if the general partner elects to
withdraw from the program, (e) approve or disapprove
the sale of all or substantially all of the assets of the
program, and (f) cancel any contract for services with
the sponsor or any affiliate without penalty upon sixty
days notice.
You first ask whether the grant or exercise of any of the six NASAA voting
rights would, pursuant to article 6132a, subject a limited partner to liability in
Texas as a general partner. We note initially that these six rights would bs
subject to additional requirements of Texas law. -See V.T.C.S. art. 6132a, S
26.
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Honorable Richard D. Latham - Page 2 (H-1229)
Section 8 of article 6132a provides:
A limited partner shall not become liable as a general
oartner unless. in addition to the exercise of his rilrhts and
r ~-~ ````
powers as a limited partner, he takes part in the cintrol of
the business.
(Emphasis added). Neither the Act itself nor the decisions construing it furnish
much guidance as to the meaning of %ontrol.” See Crane & Bromberg,
Partnerships 147 (1968). Since section 11 of article 6132zpecifically grants to a
limited partner certain rights, it has been suggested that this listing is exclusive,
and that any other act by a limited partner constitutes “control of the business.”
Other portions of the statute, however, confer additional rights upon a limited
partner, such as the right to transact business with the partnership (section 14), the
right to assign his interest (section 201, and the right of approval of all amendments
to the partnership certificate (section 26).
The few relevant cases from other ‘jurisdictions which have adopted the
Uniform Act demonstrate that the courts approach each particular fact situation
on its merits, without attempting an all-inclusive definition of ??ontrol.” See
W. E. Sell, An Examination of Articles 3, 4, and 9 of the Revised Uniform Limited
Partnership Act, 9 St. Mary’s L.J. 459, 463 (1978). Two criteria have emerged from
these decisions, however, which may be useful in addressing your inquiry. In the
first place, courts in other jurisdictions seem to agree that a limited partner
becomes liable as a general partner only when he actually “takes part in control of
the business.” They conclude that the mere m of any right of control, no matter
how broad, to a limited partner is not sufficient; exercise of a right of control is
essential to the imposition of liability. Plasteel Products Corp. v. Helman, 271 F.2d
354, 356 (1st Cir. 1959); Rathke v. Griffith, 218 P.2d 757 (Wash. 1950).
Furthermore, in virtually every instance in which liability has been imposed upon a
limited partner, that individual has been involved in the day-to-day management of
the partnership. See, e.g., Weil v. Diversified Properties, 319 F. Supp. 778, 783
(D.D.C. 1970); Holzman v. De Escamilla, 195 P.2d 833, 834 (Cal. Dist. Ct. App.
1948); Trans-Am Builders, Inc. v. Woods Mills, Ltd., 210 S.E.2d 866 (Ga. Ct. App.
1974); Gast v. Petsinger, 323 A.2d 371, 375 (Pa. Super. Ct. 1974).
With respect, then, to each of the NASAA voting rights, the mere grant,of
such right to a limited partner, without more, would probably not subject him to
liability in Texas as a general partner. As to the exercise of those rights, our
answer must depend largely upon whether those activities may be fairly said to
involve the day-to-day management of the partnership.
Section 26(a)(2) of article 8132a requires that any amendment to the
partnership certificate “[ble signed and sworn to by all members. . . .‘I Since the
Act itself thus provides that limited partners shall be participants in the amending
process, it seems clear that such participation should not be deemed to constitute
“control of the business.” We note, however, that a vote to amend by limited
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partners holding “a majority of the . . . outstanding units,” and “without the
necessity for concurrence by the general partner,” is itself, in the absence of a
petition to a district court under section 26(c), contrary to the requirement of
section 26(a)(2), that any amendment “lb] e signed and sworn to by all members.”
Neither do we believe that dissolution or election of a new general partner
are acts which may be characterized as %ontrol of the business,” since they are
acts in which each limited partner must specifically acquiesce under sections 25(b)
and 26(a)(2). Again, however, to the extent that the NASAA voting rights permit
limited partners to act without the concurrence of the general partner, it is our
view that they are inconsistent with the requirement of section 26(a)(2).
As to the fifth NASAA voting right, we do not believe that the mere approval
or disapproval of the sale of all or substantially all of the assets of a program
constitutes “control of the business.” As one authority has noted, a right of
initiation involves far more %ontrol” than does the bare right of approval. Crane &
Bromberg, Partnerships 147-48 n.37. The right to approve the sale of most of a
partnership’s assets is certainly no greater than the right to approve the dissolu ‘on
of a partnership, which right is specifically conferred upon limited partners. PBut
again, the Texas Limited Partnership Act requires that the limited partners be
unanimous in their action
$
The sixth NASAA voting right, which permits limited partners controlling a
majority of outstanding units to Wun?el any contract for services with the sponsor
or any affiliate without penalty upon sixty days notice,” is one which, in our
opinion, would result in interference in the day-to-day management of the
partnership. In summary, it is our opinion that the mere gra& of any or all of the
six NASAA voting rights would not subject a limited partner to liability in Texas as
a general partner under article 6132a. The exercise of the first five of those rights
would not as a rule impose such liability, but the exercise of the sixth right would
probably subject the limited partner to liability as a general partner. Of course,
your question requires that we address the issue generally, and we offer no opinion
as to whether a particular fact situation relating to a specific partnership might
produce a different result.
You also ask whether the grant or exercise of any of the six NASAA voting
rights would subject a limited partner to liability in Texas if the limited partnership
has been formed under the limited partnership laws of another state. If the limited
partnership has qualified to “transact business in Texas” pursuant to section 32(b) of
article 6132a, the statute provides that the
foreign limited partnership shall enjoy the same rights and
privileges, and shall be subject to the same duties,
restrictions, and liabilities, as a limited partnership formed
under this Act, but its internal affairs and the liabilities of
its limited partners shall be governed by the laws of the
urisdiction of its formation.
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Section 32(c). (Emphasis added). Thus, as to a limited partnership formed under
the laws of another state but qualified to do business in Texas, the question of
liability is totally dependent upon the law of the state in which the partnership was
formed.
If the limited partnership was formed under the laws of another state, but has
not qualified to transact business in Texas under section 32(b), section 32(k)
provides that section 32
shall not give rise to an inference as to the law governing
. . . (2) a foreign limited partnership . . . which does not
qualify hereunder.
This provision indicates that a failure of an out-ofstate limited partnership to
comply with the qualification procedures of section 32 will not necessarily result in
the imposition of general liability upon the limited partners. We believe that, in
the case of a limited partnership which does not qualify under the statute, general
choice-of-law rules must be held to prevail. Such rules indicate that liability
should be determined by the local law of the state which, with respect to the
oartioular transaction at issue. has the most significant relationship to the
partnership and to the transaction. -See Restatemen’i (Second) of Conflict of Laws
ss 291-95 (1971).
Your final question inquires about the validity of a limited partnership formed
under article 6132a and having a corporation as its sole general partner. Article
6132a itself defines a limited partnership as one “formed by two (2) or more persons
. . .‘I (emphasis added). The Texas Uniform Partnership Act, article 6132b, V.T.C.S.,
is applicable to limited partnerships except where its provisions are inconsistent
with those of article 6132a. V.T.C.S. art. 61324 S 6(2). Article 6132b includes
corporations in its definition of “person. ” Sec. 2. Furthermore, in 1973, the Texas
Business Corporation Act was amended to provide that every corporation shall have
the power “[tlo be an organizer, partner, member, associate or manager of any
partnership. . . .‘I Bus. Corp. Act art. 2.02At18). From the language of the
relevant statutes, then, it would appear that, at least since 1973, Texas law has
recognized the validity of a limited partnership having a corporation as its sole
general partner.
ln 1945, however, the Supreme Court had declared it to be “against the public
policy of this state” for a corporation to be a member of a limited partnership.
Luling Oil & Gas Co. v. Humble Oil & Refining Co., 191S.W.2d 718, 722-(Tex. 1945).
In Port Arthur Trust Co. v. Muldrow, 291 S.W.2d 31:2 (Tex. 19561, the Court created
an exceotion to the Luhns rule 3 permit a corporation to serve as a limited
oartner.‘ 291 S.W.2d at 1. On the basis of this decision. the Court of Civil
-Appeals held, in a 2-l decision in Delaney v. Fidelity Lease Ltd., 517 S.W.2d 420
(Tex. Civ. App. - El Paso 19741, that it is *‘permissible in this State to form a
limited partnership where a corporation is the only general partner.” 517 S.W.2d at
423. In rejecting this portion of the lower court’s opinion, the Supreme Court
declared, in a unanimous decision:
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The court had no point of error before it requiring such
statement to be made. Its accuracy depends upon the scope
of the corporate charter, Luling Oil & Gas Co. v. Humble Oil
& Refining Co. . . . and upon whether we should extend our
holding in Port Arthur Trust Co. v. Muldrow . . . to sanction
corporations acting as general partners, in a statutory
limited partnership.
Delaney v. Fidelity Lease, Ltd., 526 S.W.2d 543, 546 (Tex. 1975).
Professor Hamilton, in an article in the Southwestern Law Journal, strongly
criticized the Supreme Court’s remarks in Delaney. Hamilton, Corporations, 30
S.W.L.J. 153-159 (1976). He pointed out that the court did not regard the clear
language of two statutes, the Texas Uniform Partnership Act and the Texas
Business Corporation Act, as factors to be considered in determining whether a
corporation may serve as the sole general partner in a limited partnership. We are
not at liberty, however, to ignore the Supreme Court’s language, particularly within
the context of a unanimous decision. In our view, that language implies that the
court would be reluctant to extend further the exception created by the Muldrow
decision. It is of course possible that the court, when presented with a properly
preserved point of error, supported by briefs which emphasize the appropriate
statutory language of the two relevant statutes, will follow the lower court’s
majority opinion in Delaney. But such a possibility is speculative and, in our
opinion, an insufficient basis for ignoring the court’s ruling in a, which remains
the last expression of the Supreme Court on the question at issue. On the basis of
the court’s language in Delaney, we do not believe that a corporation may, in Texas
at this time, serve as the sole general partner of a limited partnership.
SUMMARY
The mere grant of any or all of the six “voting rights of
limited partnerships” promulgated by the North American
Securities Administrators Association would probably not
subject a limited partner to liability in Texas as a general
partner under article 6132a, V.T.C.S. The exercise of the
first five of those rights would not as a rule impose such
liability but the exercise of the sixth right would probably
subject the limited partner to liability as a general partner,
and the exercise of any of them without the consent of all
partners would be contrary to the requirements of section 26
of the Act. On the basis of the Supreme Court’s language in
Delaney v. Fidelity Lease, Ltd., 526 S.W.2d 543 (Tex. 1975),
a corporation may not, in Texas at this time, serve as the
sole general partner of a limited partnership.
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Honorable Richard D. Latham - Page 6
APPROVED:
DAVID M. KENDALL, First Assistant
Opinion Committee
jsn
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