The Company Agreement Explained: What Are Fundamental Business Transactions & Why Are They Important?
February 11, 2014 | By Vela Wood
Here at VW, we’re proud to form dozens, if not hundreds, of new Texas LLCs for aspiring startups and new small business owners each year. As part of our LLC formation package, we advise our clients on the best structure for them, file the Certificate of Formation with the Secretary of State, and then draft a Company Agreement tailored to our clients’ needs, and the Company’s initial member or manager resolution.
Even with the pre and post-formation consultations to go over the documents, our clients usually call us back after a few weeks to ask questions, most often regarding the lengthy Company Agreement. Many of the questions tend to focus on the decision making process between the members and managers of the LLC.
In our previous blog, Simple Majority v. Super Majority, we discussed the importance of having different consent levels for different types of decisions made by members or managers of an LLC. Members and managers of an LLC also need to be aware of what a “fundamental business transaction” is and should take special consideration as to what consent is required for such a decision.
What is a Fundamental Business Transaction?
The Texas Business Organizations Code (“TBOC”) defines fundamental business transaction in Chapter 1, which means that the definition applies to all types of Texas entities (LLCs, corporations, limited partnerships, etc.).
According to TBOC Section 1.002(32), a fundamental business transaction is defined as “a merger, interest exchange, conversion, or sale of all or substantially all of an entity’s assets.”
The Importance of Fundamental Business Transactions
As the definition above suggests, fundamental business transactions are major decisions that managers and/or members of an LLC may face. Fundamental business transactions require a lot of thought and due diligence by managers and/or members of an LLC because of the ramifications and changes such a decision could potentially bring to an LLC and its owners. As a result, the owners of an LLC should ascribe an appropriate level of consent to authorize and approve fundamental business transactions.
In LLCs with multiple members, it is usually advisable to set the consent level to greater than a simple majority. This is very important because the TBOC only requires simple majority consent for a fundamental business transaction. Thus, if your Company Agreement doesn’t define a level of consent required to approve a fundamental business transaction, a majority vote will carry the decision.
This can put the LLC and its managers and/or members in a sticky situation down the road. Obviously, the consent level is not going to matter for a single member entity, but once an LLC has more than one member, the consent level merits careful consideration. You can read more on consent levels for multi-member LLCs in the Simple Majority v. Super Majority blog.
Please reach out to your attorney for drafting a Company Agreement or reviewing your current Company Agreement to make sure it fits your specific situation.