# The Attorney General of Texas August 16, 1978
JOHN L.HILL Attorney General

Honorable Richard D.Latham Securities Commissioner State Securities Board 709Lyndon Baines Johnson Building Austin, Texas 787ll Opinion No. H-1229 Re: Voting rights in limited partnerships.

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 isa member, has promulgated guidelines for registration of certain securities. Recently, NASAAamended 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 ofLimited 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 document, (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 NASAAvoting rights would, pursuant to article 6132a,subject alimited partner toliability in Texas as a general partner. Wenote initially that these six rights wouldbs subject to additional requirements of Texas law. See V.T.C.S. art. 6132a,S - 26.

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Section 8of article 6132aprovides: 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 11of article 6132zpecifically grants to a limited partner certain rights, it has been suggested that this listing is exclusive, and that any other act by alimited 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 9of the Revised Uniform Limited Partnership Act, 9St. Mary’sL.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 ageneral partner only when he actually “takes part incontrol of the business.” They conclude that the mere m ofany right ofcontrol, no matter how broad, to a limited partner is not sufficient; exercise of a right of control is essential to the imposition ofliability. Plasteel Products Corp. v. Helman, 271F.2d 354, 356 (1st Cir. 1959); Rathke v. Griffith, 218 P.2d 757 (Wash. 1950). Furthermore, invirtually 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, 319F. Supp. 778, 783 (D.D.C. 1970);Holzman v. De Escamilla, 195P.2d 833, 834 (Cal. Dist. Ct. App. 1948);Trans-Am Builders, Inc. v. Woods Mills, Ltd., 210S.E.2d 866 (Ga. Ct. App. 1974);Gast v. Petsinger, 323A.2d 371,375(Pa. Super. Ct. 1974). With respect, then, to each of the NASAAvoting 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 ofsection 26(a)(2). As to the fifth NASAAvoting right, wedonot 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 ofapproval. Crane & Bromberg, Partnerships 147-48 n.37. The right to approve the sale of most of a partnership’s assets iscertainly nogreater than the right to approve the dissolu ‘on P of a partnership, which right is specifically conferred upon limited partners. But 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 ofoutstanding 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 sixNASAAvoting rights wouldnot subject alimited partner to liability inTexas as a general partner under article 6132a. The exercise of the first five ofthose rights wouldnot 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 weaddress the issue generally, and we offer no opinion as to whether a particular fact situation relating to a specific partnership might produce adifferent result. You also ask whether the grant or exercise of any of the six NASAAvoting rights would subject alimited partner to liability inTexas ifthe limited partnership has been formed under the limited partnership laws ofanother state. Ifthe limited partnership has qualified to “transact business inTexas” 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 alimited 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 ofits 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 ofthe state in which the partnership was formed. Ifthe limited partnership was formed under the laws ofanother 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 ofsection 32will not necessarily result in the imposition of general liability upon the limited partners. Webelieve 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 ofalimited partnership formed under article 6132a and having a corporation as its sole general partner. Article 6132aitself defines alimited partnership asone “formed bytwo (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.2d718,722-(Tex. 1945). In Port Arthur Trust Co. v. Muldrow, 291S.W.2d 31: an exceotion to the Luhns rule 2(Tex. 19561,the Court created 3 permit a corporation to serve as a limited 1. On the basis of this decision. the Court of Civil oartner.‘ 291 S.W.2d at -Appeals held, in a 2-l decision in Delaney v. Fidelity Lease Ltd., 517S.W.2d 420 (Tex. Civ. App. - El Paso 19741,that it is *‘permissible in this State to form a limited partnership where acorporation isthe only general partner.” 517S.W.2d at 423. In rejecting this portion of the lower court’s opinion, the Supreme Court declared, in aunanimous 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&GasCo. 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., 526S.W.2d543, 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 alimited partnership. Weare 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 ina, which remains the last expression of the Supreme Court on the question at issue. Onthe basis of the court’s language in Delaney, wedonot believe that acorporation may, inTexas at this time, serve asthe sole general partner ofalimited 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 becontrary to the requirements ofsection 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 ofalimited partnership.

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APPROVED:

DAVIDM.KENDALL, First Assistant

Opinion Committee jsn

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