Texas Legislature Amends Statute on Choice of Law

On May 27, 2011, the Governor of the State of Texas signed into law amendments to the Texas choice-of-law statute that, effective September 1, 2011, will afford parties greater flexibility when choosing a governing law for many transactions involving at least $1,000,000. 

The amendments expand and clarify existing statutory rules and include, among other things, an important change for syndicated loan and other multi-lender transactions, in that the amendments permit parties to a loan transaction to choose, as the governing law for the transaction, the law of any jurisdiction in the United States where a party to the transaction has an office, so long as the transaction also involves at least $25,000,000 of credit extended by at least three lenders.

These changes are contained in H.B. No. 2991, which amends the choice-of-law statute adopted by the Texas Legislature in 1993, later recodified in what is now Chapter 271 of the Texas Business and Commerce Code.  Under the statute, parties to a transaction involving at least $1,000,000 may, with certain exceptions, agree in writing that their agreements will be governed by the laws of a particular jurisdiction if the transaction bears a reasonable relation to the chosen jurisdiction. Since its original passage, the statute has set out five safe-harbor factors as to what ─ under Texas law ─ constitutes a reasonable and enforceable choice of governing law.  These safe harbors have never applied to certain types of transactions, such as those involving transfers of title to real property, methods of foreclosure, marriage, adoption and matters of inheritance, and H.B. No. 2991 does not change any of these exclusions from the coverage of the statute. 

H.B. No. 2991 is intended to reflect modern business practice by adding to, and clarifying, the list of statutory safe harbors. In addition to the new safe harbor for multi-lender loan transactions noted above, H.B. No. 2991:

• amends an existing safe harbor ─ in recognition of the fact that negotiations are often conducted by telephone and e-mail without in-person meetings ─ to clarify that the parties to a transaction may choose the law of a particular jurisdiction to govern their transaction if a substantial part of the negotiations relating to the transaction occurs in or from that jurisdiction and an agreement relating to the transaction is signed in that same jurisdiction by one of the parties,
• clarifies that the statutory list of safe-harbor contacts is a non-exclusive list so that parties to transactions covered by Chapter 271 of the Texas Business and Commerce Code may also rely on other choice-of-law rules, such as those found in the Restatement (Second) of the Law of Conflict of Laws,
• expressly authorizes parties to choose the law of the jurisdiction of formation of an entity to govern any transaction involving at least $1,000,000 that relates to the governing documents or internal affairs of that entity, such as a transaction involving:
  • a shareholder or other agreement among members or owners of the entity,
  • an agreement or option to acquire a membership or ownership interest in the entity,
  • the conversion of debt or other securities into an ownership interest in the entity, or
  • any other matter relating to rights or obligations with respect to the entity’s membership or ownership interests, and  

• clarifies that a choice of law may continue to apply to a transaction, notwithstanding changes in facts and circumstances (including changes in parties and amendments or restatements of agreements relating to the transaction), if the chosen law was reasonably related at the outset of the transaction.

H.B. No. 2991 leaves unchanged the following additional safe harbors contained in existing Chapter 271 for determining when a transaction bears a reasonable relation to a particular jurisdiction:

• a party to the transaction is a resident of that jurisdiction,
• a party to the transaction has the party’s place of business or, if that party has more than one place of business, the party’s chief executive office or an office from which the party conducts a substantial part of the negotiations relating to the transaction, in that jurisdiction,
• all or part of the subject matter of the transaction is located in that jurisdiction, or
• a party to the transaction is required to perform in that jurisdiction a substantial part of the party’s obligations relating to the transaction, such as delivering payments.

These amendments were part of a legislative package sponsored by the Texas Business Law Foundation, a non-profit organization founded in 1988 to support a favorable business climate in the State of Texas. The Foundation is currently chaired by Gail Merel, a partner of the Firm who also worked on drafting these amendments. Mike Jewesson, Counsel in the Firm’s Dallas office, serves as Secretary-Treasurer of the Foundation.