The reason for the registration requirement is largely based on the state’s interest in protecting its citizens.  Domestic entities file certificates of formation that describe the nature of the business and any limitations on the business’s liability.  Consumers and other businesses can search the Secretary of State’s database to learn the details of any company they wish to transact with.  In the case of foreign entities, there is no information available with the Secretary of State if the business is a foreign entity.  Absent a foreign entity registration, there is a risk that one of the state’s citizens might transact with that foreign entity without realizing its true nature.

Texas Foreign Entity Registration Requirement

In Texas, a foreign entity is required to register with the Secretary of State’s Office to “transact business in this state,” if it is one of several types of entities:  a foreign corporation, foreign limited partnership, foreign limited liability company, foreign business trust, foreign real estate investment trust, foreign cooperative, foreign public or private limited company, or another foreign entity, the formation of which, if formed in this state, would require the filing of a certificate of formation.

This means there are two questions to determine whether a foreign entity is reqruiement to register in Texas: (1) is it a specified type of entity; and (2) is the entity transacting business in this state.  The first requirement is easy enough to determine.  Usually it is the determination of whether or not an entity is transacting business in Texas that is more difficult.

Fortunately, the law and the Attorney General’s office provide some guidance on that determination.  The Texas Business Organizations Code lists specific activities that do not constitue “transaction of business in this state,” including:

1. maintaining or defending an action or suit or administrative or arbitration proceeding;
2. holding a meeting of managerial officials, owners, or members or carrying on another activity concerning the entity’s internal affairs;
3. maintaining a bank account
4. maintaining an office or agency for: transferring or registering securities the entity issues; or appointing or maintaining a trustee related to the entity’s securities;
5. voting the interest of an entity the foreign entity has acquired;
6. effecting a sale through an independent contractor;
7. creating or acquiring indebtedness or a mortgage or other security interest in real or personal property;
8. securing or collecting a debt due the entity or enforcing a right in property that secures a debt due the entity;
9. transacting business in interstate commerce;
10. conducting an isolated transaction that is completed within a period of 30 days and is not a number of repeated similar transactions;
11. investing in or acquiring in a transaction outside of this state, a royalty or other nonoperating mineral interest;
12. executing a division order, contract of sale, or other instrument incidental to ownership of a nonoperating mineral interest; or
13. owning, without more, real or personal property in this state.

Effect of Failing to Register a Foreign Entity in Texas

So what happens if a foreign entity that was required to register under the Texas Business Organizations Code?  There are several consequences that could affect a business’s relationship with both the State and any relationships it has with domestic entities.

First, the Attorney General is empowered to enjoin the foreign entity from transacting business in the State if the entity is not registrered or the registration was obtained through false or misleading information.

Second, and perhaps the most important consequence, a foreign entity that fails to register may not maintain an action, suit, or proceeding in a Texas court on a cause of action that arises out of the transaction of business in Texas.  While this sounds quite punitive, the failure to register does NOT: affect the validity of any contract; prevent the entity from defending an action, suit , or proceeding; or cause any owner, member, or manager to be come personally liable for the debts, obligations, or liabilities.

Third, there is a civil penalty for failing to register.  The penalty is the amount of all fees and taxes that should have been imposed from the time the entity first should have registered plus penalties and interest imposed by law.

I recently had the opportunity to speak with Josh Kayser, a small business compliance expert with SuretyBonds.com.  Josh was gracious enough to indulge me in creating a podcast of that interview and you can listen to it by clicking on the link below.  Over the course of the interview we discussed a range of topics relating to surety bonds including: the purpose of surety bonds; the importance of surety bonds to small businesses; the process of obtaining a surety bond; the costs of surety bonds; and what a bondholder must do to maintain a bond.

Podcast: Surety Bonds-Josh Kayser

What a mess NBC has created for themselves.  Now let me start by stating that I am not privy to the actual contracts between NBC and their affiliates, Jay Leno, Conan O’Brien, or Jimmy Fallon.  But there is a lot of speculation about the current situation and there are lessons for every business owner when it comes to contracts with key employees.

First let me discuss the situation.  NBC decided to move Jay Leno to a 10pm EST show and essentially promote Conan to “The Tonight” show at 11:30pm EST.   I think Jimmy Fallon is an extremely funny individual and I mean no disrespect but for the purposes of this lesson I am going to ignore him.

The problem is that NBC’s affiliates felt the result of that decision in lowering ratings for their late night news casts.  Those lower ratings led them to threaten NBC with preempting the “Jay Leno Show” for their own programming leading into the nightly news.

Even though NBC was making money on the “Jay Leno Show,” due to lower production costs, the affiliates were losing money and if they dropped the show it would destroy NBC’s profits from the show.  At this point, it appears NBC has given in and canceled the “Jay Leno Show.”   The latest reports indicate that NBC has presented a proposal to the three hosts.  That proposal calls for Leno to host a show from 11:35pm EST-12:05pm EST, O’Brien to host “The Tonight Show” from 12:05pm EST- 1:05pm EST, and Fallon to host his show from 1:05pm EST-2:05pm EST.

Second, let me discuss the mess.  Each of the affiliates have contracts with NBC.  Each of the hosts have contracts with NBC.  Now the scope of the mess depends upon the terms of each individual contract, and as I stated before, I have absolutely no knowledge of the actual terms of those contracts so my discussion is pure conjecture at this point.  But based upon the statements and actions of NBC I am going to speculate on the contents of those contracts because I believe there are some lessons for every business owner to learn.

Lesson #1: The terms of the contracts with the hosts do not meet the terms of the contracts with the affiliates.

Initially I wanted to title this lesson, “The terms of the contracts with the affiliates contradict the terms of the contracts with the hosts.”  But that isn’t quite accurate.  What I am getting at is that the company failed to consider the effects of a breach of contract.  Perhaps more importantly, NBC failed to consider the collateral effects of a breach on other contracts.  Remember, this situation started because NBC thought it could move Leno’s “Tonight Show” ratings to the 10pm EST time slot.  NBC failed to account for the possibility that those rating would not move with the show when it contracted with Leno, O’Brien, and Fallon.  While most people automatically think of a breach of contract in legal terms, the fact is that it can be a business decision.  NBC forgot that fact and now it is paying the penalty.

Lesson #2: Firing an employee with a contract can be expensive.

I don’t know but I am speculating there is one helluva penalty in Conan O’Brien’s contract with NBC.  There are a few reasons this seems obvious to me.  Leno was the King of Late Night when he left.  If NBC wanted him to return to that position it is as simple as snapping their fingers, unless significant money is involved.  Based upon the reports I have seen, NBC has presented a proposal to all three hosts for their consideration so they aren’t snapping their fingers.  This means that if O’Brien does not accept their offer, the terms of his contract govern.  Thus, NBC would not have made the effort of this offer unless they were concerned about the terms of his contract.  Also, O’Brien moved himself and his family across the country when this opportunity presented itself.  He would have done himself an injustice if he did not negotiation terms that provided security for that opportunity given his sacrifice.  The lesson for business owners is to be careful what you contract for because contracts are binding obligations and they can limit the decisions you can make.  NBC finds itself in the position of, in essence, needing the approval of one employee to bring back another employee responsible for creating a #1 rated show.

Lesson #3: Take advantage of the opportunity to maximize or limit your damages.

So what if NBC is found to have breached it’s contract with O’Brien?  What is the extent of the company’s liability?

Generally, contract damages are limited to actual damages and the party suffering those damages has a duty to mitigate them.  In this case, O’Brien has a duty to make a reasonable attempt to find another “similar” job.  He could sue NBC for breach of contract whether he finds another job or not, but the extent of NBC’s exposure depends upon the results of his search.  If O’Brien finds a job, then his recovery is limited to the difference between the amount he received at the new job and the amount he was to receive under the terms of the contract.

If O’Brien is unsuccessful in finding a new job and makes reasonable efforts to mitigate his damages, then he would be entitled to recover the entire amount he is due under the contract.

However, each party has the ability to limit its liability or maximize the opposing party’s liability at the time they contract.  You often see this in “buy-out” terms with college football coaches.  The Mike Leach case is a recent example.  He was due a certain amount per year, but if he was terminated prior to the end of his contract the school was only liable to him for a portion of that amount unless he was fired “for cause,” in which case the school owed him nothing.   That case presents some other issues (“for cause” is a subject all its own) so it isn’t a perfect example, but you get the idea.  An employer and an employee, and for that matter a business and its client, have the opportunity to  maximize or limit their liabilities when drafting a contract.

Rush’s tips on avoiding wage and hour lawsuits:

• Conduct a wage and hour review
• Train managers
• Think exempt-non exempt, not just salary-hourly
• Take complaints on wage issues seriously
• Do not retaliate
• Develop strong policies on pay practices and employee hours.

You can get get more detail on each of these suggestion by visiting his blog.

You can see the full interview here.

In Dealer Computer Svc v. Old Colony Motors the 5th Circuit ruled that a trial court did not have the authority to compel a party to pay an arbitration deposit.  The underlying dispute is not important for this post.   Neither party disputed the existence and validity of an arbitration clause in the contract.  That arbitration clause specified that the AAA Commercial arbitration Rules would govern any dispute.

The issue was Old Colony’s inability to pay its portion of the arbitration deposit.  Old Colony was still willing to arbitrate but it could not pay its portion of the fees involved.  As a result, the arbitrator asked Dealer Computer to pay the entire fee.  Dealer Computer refused and the arbitrator suspended the matter indefinitely.   Dealer Computer filed suit to compel the arbitration and the trial court ordered Old Colony to pay its share of the deposit.

On appeal, the Court agreed with Old Colony’s argument that the trial court did not have the authority to order it to pay those fees.  The key to its decision is that the Supreme Court has stated, “absent an agreement to the contrary, the parties intend that the arbitrator, not the courts, should decide certain procedural questions which grow out of the dispute and bear on its final disposition.”  Payment of fees is just such a procedural question.

The Court turned to a 9th Circuit case, Lifescan, Inc. v. Premier Diabetic Servs., Inc. in support of its ruling.  In that case the 9th Circuit noted that arbitrators have the discretion to require fee deposits and could change those rules to require one party to pay the deposit if they choose.  Such a decision was entirely a procedural matter and not subject to a court order.

The Court also noted that AAA rules allowed arbitrators the discretion to order either party to pay the fee in full and to suspend or terminate the arbitration if those fees are not paid.  Any award could be adjusted upward or downward as appropriate if one party paid more than its fair share of the fees involved. The Court specifically avoided deciding whether a party could challenge an arbitrator’s decision if they did not adjust the award.

So why would this decision cause a company to rethink an automatic commitment to arbitration?

First, expenses.  The commonly misunderstood belief is that arbitration is a cheaper alternative to the court system.  But look at this case, the arbitrator’s deposit was in excess of $50,000.  Dealer Computer was asked to pay Old Colony’s portion of $26,000 as well as its own just to get the case before an arbitrator with no guarantee of success.  The fees to file suit in court are no where near this amount.  A company has to pay attorney’s fees in both cases.  If Dealer Computer had filed suit and Old Colony could not afford legal counsel, Dealer Service’s attorney’s fees would likely be minimal and the case would end relatively quickly.

Second, collectibility.  Now this is an issue in any dispute: does the other party have the assets available to satisfy a judgment?  But in this case Dealer Computer has to double down on its filing fees. If it wins in arbitration and if those additional fees are part of the award, it won’t matter one bit if it can’t collect.  Dealer Service will have just thrown good money after bad.

Third, indefinite delay.  Is it possible that Dealer Computer could never get its day before a decider of fact?  Because there is an arbitration clause, a Court cannot order Old Colony to pay its share of the fees.  Because there is an arbitration clause, Dealer Computer cannot bring suit in court.  As long as Old Colony does not pay its share, Dealer Computer’s only option is to shoulder the costs and risks involved by paying both parties’ fees.  If the merits of the case are a close call, say a 55/45 deal(or even 60/40) in Dealer Computer’s favor it might not be worth it.  A party could escape its liabilities by simply stating it is willing to participate in arbitration but then refusing to pay its share of the fees.

Unfortunately, things are going to look a little odd for a while and it may take a few days to get all of the site’s functionality back up and running.  When it comes to work and blogging work wins out so I’m sometimes limited as far as time to work on this blog.  Please be patient and it will pay off I promise.