Guide to Doing Business

Texas
Prepared by Lex Mundi member firm,
Baker Botts L.L.P.

This guide is part of the Lex Mundi Guides to Doing Business series which
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 LEGAL GUIDE

TO DOING BUSINESS

IN TEXAS

BAKER BOTTS L.L.P.

 TABLE OF CONTENTS

DISCLAIMER

INTRODUCTION
Geographic Description
Investment Climate
Infrastructure
Educational Institutions

BUSINESS ENTITIES
Corporations
State of Incorporation
Corporation Formation
Certificate of Formation
Name
Bylaws
Authorized Shares
Meetings of Shareholders and Directors
Authority of Shareholders, Directors and Officers
Limited Liability
Foreign Corporations
Annual Reports/Franchise Tax
Partnerships
Partnership
Limited Partnership
Limited Liability Companies
Assumed Business Names

STATE TRADE REGULATION

Texas Antitrust Law
Covenants Not to Compete
Deceptive Trade Practices
Theft of Trade Secrets
Business Opportunities

TAXATION
State and Local Taxation
Sales and Use Tax
Property Tax
Franchise Tax
Other Taxes
No Personal Income Tax
LABOR
State Labor Laws
Texas Commission on Human Rights Act (TCHRA)
Discrimination Based on Genetic Information
Religious Accommodation
Unemployment Compensation Act
Employment of Children
Wage and Hour Provisions
"Right to Work" Law
Workers' Compensation Act
Disclosure of Information about Employees
Arbitration Agreements
Noncompetition Agreements

ENVIRONMENTAL
Delegated Federal Programs
State Programs

INTELLECTUAL PROPERTY
Trademarks and Service Marks
Trade Names
Trade Secrets
Ownership of Employee-Developed Inventions
Right of Publicity

DISPUTE RESOLUTION
State Court System
State Trial Courts
Texas Municipal Courts
Texas Justice of the Peace Courts
Constitutional County Courts
County Courts at Law
Texas District Courts
Proceedings
State Appellate Courts
Texas Courts of Appeals
Court of Criminal Appeals
Texas Supreme Court
Alternative Dispute Resolution in Texas

FINANCING
Tax-Exempt Financing
Commercial Banking
State Blue Sky and Other Securities Issues
REAL ESTATE
State Real Estate Law

STATE AGENCIES
 DISCLAIMER

The information in this Legal Guide represents a general guide to certain Texas state laws
applicable to doing business in Texas and is based on information available as of November 1,
2010. This guide does not address United States federal law issues and should not be relied upon
in any specific factual situation. It is not intended to cover all laws or regulations that may be
applicable to a specific factual situation. If you have questions or specific issues to be resolved,
you should contact a lawyer authorized to practice in Texas.

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 INTRODUCTION

Geographic Description

Texas is located in the southern United States and extends from the Gulf of Mexico to the
Guadalupe Mountains of far West Texas and from the semitropical Lower Rio Grande Valley to
the High Plains of the Panhandle, a distance of over 700 miles. Texas occupies about 7 percent
of the total water and land area of the United States, consisting of 261,914 square miles of land
and 5,363 square miles of water. The State’s population was estimated at 24.7 million in July
2009 by the U.S. Census Bureau. http://www.texaswideopenforbusiness.com/assets/documents/Texas-
Economic-Overview.pdf

Investment Climate

Texas offers a favorable business climate, with relatively low wage rates and taxes. Other
factors contributing to the favorable business climate are an excellent transportation system,
strong motor freight and railroad services, deep-water port facilities and a number of major
airports.

Fifty-seven Fortune 500 businesses are headquartered here, including high-tech companies such
as Dell, Texas Instruments and AT&T, three national airlines (Continental, Southwest and
American) and global energy companies including Conoco, Exxon, Valero and Marathon.
http://money.cnn.com/magazines/fortune/fortune500/2010/states/TX.html

Unlike most other states, Texas has no personal income tax.

http://money.cnn.com/2010/07/13/news/economy/california_texas_economy.fortune/index.htm

Between 2006 and 2010, despite the recession in the second half of that period, Texas created an
additional 344,000 jobs of which over 134,000 were added between July 2009 and July 2010.
http://governor.state.tx.us/ecodev/business_research

Texas citizens ranked second in the nation for patents granted in 2009 with 6,417, according to
the U.S. Patent & Trademark Office. http://www.texaswideopenforbusiness.com/assets/documents/Texas-
Economic-Overview.pdf

In a May 2010 survey of CEOs by Chief Executive Magazine, Texas was ranked the best state
for business development and job growth for the sixth year in a row.
http://www.governor.state.tx.us/news/press-release/14581/

Texas is home to three of the ten largest American cities: Houston (4th); San Antonio (7th); and
Dallas (9), all of which grew by a minimum of 18% between 1990 and 2000. Austin was ranked
15th and Ft. Worth placed 17th in the nation for population size in 2009.
http://www.infoplease.com/ipa/A0763098.html

Infrastructure

Excellent transportation contributes to the state’s business climate, including a number of

international airports and an extensive network of highways and rail systems. The Port of
Houston was ranked 15th in the world and 2nd in the United States for total cargo volume in

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2008. In addition to nuclear and gas-fired power plants, Texas had over 9,400 MW of installed
wind power capacity at the end of 2009, far above every other state and more than triple that of
California.

Educational Institutions

Texas strongly supports higher educational institutions with significant state assets permanently
allocated to its colleges and universities. Several Texas universities and research institutions are
leaders in electronics, medical, biotechnology, aerospace, advanced materials, and energy-related
research. The University of Texas in Austin and Texas A&M University in College Station had
a combined enrollment of more than 100,000 students in the fall of 2010. The State ranked third
in the nation for Engineering and Science doctorates with 1,930 awarded in 2006, according to
the National Science Foundation. http://www.texaswideopenforbusiness.com/assets/documents/Texas-
Economic-Overview.pdf

The approximate 1,000-acre Texas Medical Center, located in Houston, Texas, is the largest in
the world with 14 hospitals, three medical schools and six nursing schools. Twenty-thousand
physicians, researchers and scientists with advanced degrees work with 70,000 other employees
in this city of 162 buildings.
http://www.texasmedicalcenter.org/images/2010_FactsAndFigures_FA.pdf

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 BUSINESS ENTITIES
Corporations

State of Incorporation. The Texas Business Organizations Code (BOC) became effective on
January 1, 2006. The BOC provides an updated, more uniform manner of creating various types
of entities (for example, corporations, partnerships and limited liability companies) by, among
other things: adopting a common system of naming formation documents; providing more
uniform filing mechanics; and standardizing the entity formation process.

The BOC applies to (a) all Texas corporations, partnerships, limited liability companies and
other domestic filing entities formed on and after January 1, 2006 and (b) all foreign filing
entities registering to do business in Texas on or after January 1, 2006. Existing domestic and
foreign entities automatically became subject to the BOC on January 1, 2010, unless those
entities elected early adoption of the BOC.

Corporate Formation. A Texas corporation can be formed by filing its certificate of formation
(Certificate) with the Texas Secretary of State (Secretary). The Certificate must be signed by an
organizer and filed with the Secretary.

Certificate of Formation. The Certificate is a matter of public record. It must specify the name
of the corporation, the period of duration (which may be perpetual), the purpose for which the
corporation is organized, the initial registered agent and registered office, name and address of
the organizer, the names and addresses of the initial board of directors, and the number of
authorized shares and the designation of any classes of shares and their relative rights. Other
provisions may be included which are not inconsistent with law such as limitations on the
liability of directors, reservation of preemptive rights, granting of cumulative voting and voting
requirements for written shareholder consents. After shares are issued, amendments to the
Certificate may be made only with shareholder approval.

Name. The corporate name must contain the word "corporation," "incorporated," "company,"
“limited,” or an abbreviation of one of those words, and the name must not be deceptively
similar to the names of other corporations doing business in Texas or contain language that
would imply it is organized for any purpose other than the one(s) contained in its Certificate.

Bylaws. The Bylaws are not a matter of public record. The Bylaws contain provisions for
regulation and management of the affairs of the corporation, dealing with such matters as
meetings of shareholders, meetings of directors, election and authority of officers, and
indemnification of directors and officers. The Bylaws may be amended by the directors or the
shareholders unless that power is reserved only to the shareholders in the Certificate or Bylaw
provisions.

Authorized Shares. Shares of capital stock may be issued for any consideration deemed
sufficient by the Board, including cash, services performed or contracts for services to be
performed, promissory notes, securities of the corporation or other securities. The number of
authorized shares specified in the Certificate is the maximum number of shares which may be
issued, with no obligation for a corporation to issue all authorized shares. A corporation may
issue one or more classes of shares having different rights and preferences, and any such class

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may be divided into one or more series. Shares having a par value may not be issued for less
than the par value thereof.

Meetings of Shareholders and Directors. Texas law provides for annual meetings and special
meetings of shareholders. Failure to hold the annual meeting at the time designated does not
work a dissolution of the corporation. Shareholders may also act by written consent in lieu of a
meeting. Shareholders elect the Board of Directors at the annual shareholders meeting. The
Board of Directors, which may consist of one or more directors, elects officers and manages the
business and affairs of the corporation. Directors need not be citizens or residents of the State of
Texas or of the United States unless the Certificate so requires. Directors may act by unanimous
written consent in lieu of a meeting. Notice requirements for shareholders and directors
meetings are set forth; however attendance by a director at a meeting constitutes a waiver of
notice in most circumstances.

Authority of Shareholders, Directors and Officers. The shareholders must vote or consent to
approve certain corporate actions such as mergers, amendments to the Certificate, the sale of all,
or substantially all, the property and assets of the corporation, if not made in the usual course of
its business, and dissolution. Other matters are voted on by the Board, including most types of
amendments to the Bylaws, payments of dividends, issuance of shares, corporate loans and other
significant transactions outside the ordinary scope of the day-to-day business. The Board also
elects officers, which must include a President and a Secretary and usually also includes one or
more Vice Presidents and a Treasurer. There may also be a Chairman of the Board, a Chief
Executive Officer, a Chief Operating Officer, a Chief Financial Officer and one or more
Assistant Secretaries and Assistant Treasurers. Two or more offices may be held by the same
person. Officers need not be citizens or residents of the State of Texas, or of the United States.

Limited Liability. Corporate shareholders, as such, are generally not liable for corporate
obligations unless they agree to guarantee such obligations or unless a court finds that the
corporate form should be pierced because the corporation did not maintain formal corporate
practices.

Foreign Corporations. No foreign corporation is entitled to transact business in Texas until it

has filed with the Secretary an application for registration to transact business in the State of
Texas. Each foreign corporation authorized to transact business in Texas must maintain a
registered office and a registered agent in the state. The registered agent of a foreign corporation
authorized to transact business in Texas is the agent of such corporation upon whom process,
notice or demand required or permitted by law to be served on the corporation may be served. A
foreign corporation which transacts business in Texas without having filed a registration to do so
shall be liable for all fees and franchise taxes which would have been payable if such registration
had been obtained, plus all applicable penalties.

Annual Reports/Franchise Tax. Corporations organized in Texas or otherwise authorized to do

business in Texas must file an Annual Franchise Tax Report with the Comptroller of Public
Accounts each year setting forth certain financial information relating to calculation of the Texas
franchise tax and other information including the names and addresses of its officers and
directors.

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Partnerships

Partnership. A partnership is an association of two or more persons to carry on a business for

profit as owners. The persons may be individuals, corporations and other entities. Texas
partnerships (general and limited) are governed generally by Title 4 of the BOC. A partnership
is an entity distinct from its partners.

Except as prohibited by law, a partnership agreement governs the relations of the partners and
between partners and the partnership. If not addressed by the partnership agreement, the
applicable provisions of the BOC govern those relations.

Each partner is an agent of the partnership for the purpose of its business. Unless a third party
knows that a partner does not have authority to act for the partnership in a particular matter, an
act of a partner binds the partnership if the act is for apparently carrying on the partnership
business in the ordinary course. Generally, all partners are liable jointly and severally for all
debts and obligations of the partnership.

A partnership may become a limited liability partnership by filing an appropriate application

with the Texas Secretary of State. An annual renewal application must be filed in order to
maintain the effectiveness of the registration. A limited liability partnership's name must contain
the words "limited liability partnership" or the abbreviation "L.L.P." as the last words or letters
of its name. A partner in a limited liability partnership is not individually liable for obligations
of such partnership, except where the partner was involved in acts or omissions of another
partner giving rise to the obligation or where the partner knew of such acts or omissions and
failed to take reasonable steps to prevent or cure such acts or omissions.

Limited Partnership. A limited partnership is a partnership formed by two or more persons

under the laws of Texas and having one or more general partners and one or more limited
partners. A person may be an individual, corporation, partnership or other entity.

The name of a limited partnership must contain the words "Limited Partnership", "Limited", or
the abbreviation "L.P." or "Ltd." as the last words or letters of its name and may not contain,
except in certain circumstances, the name of a limited partner. The exclusive right to use of a
name may be reserved for 120 days by filing an appropriate application with the Secretary of
State of Texas.

A limited partnership or a foreign limited partnership subject to the BOC must maintain a
registered office and a registered agent for service of process in Texas.

To form a limited partnership, the partners must enter into a partnership agreement and each
general partner must execute a Certificate of Formation. The certificate must be filed with the
Secretary of State of Texas.

A limited partnership may become a limited liability partnership or a limited liability limited
partnership (LLLP) if it complies with the requirements of the BOC applicable to such entities.

Except as provided by the BOC, a general partner of a limited partnership has the liabilities of a
partner in a partnership without limited partners to persons other than the partnership and the

6
other partners. Except as provided by the BOC, a limited partner is not liable for the obligations
of a limited partnership, unless the limited partner is also a general partner or, in addition to
exercising the limited partner's rights as a limited partner, the limited partner participates in the
conduct of the business.

Before transacting business in Texas, a foreign limited partnership must file an appropriate
application with the Secretary of State of Texas. A foreign limited partnership must maintain a
registered office and a registered agent for service of process in Texas.

Limited Liability Companies

Title 3 of the BOC permits any person, which includes an individual, corporation, or other entity,
to act as an organizer of a limited liability company by signing and filing a Certificate of
Formation for such company with the Secretary of State of Texas.

The name of a limited liability company must contain the words "Limited Liability Company" or
"Limited Company" or the abbreviations "L.L.C.", "LLC", "LC", or "L.C.". The word "Limited"
may be abbreviated as "Ltd." or "LTD" and the word "Company" may be abbreviated as "Co".
The exclusive right to the use of a limited liability company name may be reserved for 120 days
by filing an appropriate application with the Secretary of State.

Each limited liability company or foreign limited liability company subject to the BOC must
maintain a registered office and a registered agent in Texas.

A limited liability company may have one or more members. The members normally adopt the
Company Agreement of the limited liability company containing provisions for the regulation
and management of the affairs of the limited liability company. Except to the extent reserved to
the members by the Certificate of Formation, the business of the limited liability company may
be managed by a manager or managers elected by the members. Generally, the Company
Agreement contains provisions regarding the number and election of managers, the manner of
filling a manager vacancy, committees of managers and meetings of managers. One or more
persons, who may or may not be members or managers, may be designated as officers of the
limited liability company.

Except as otherwise may be provided in the Company Agreement, a member or manager is not
liable for the debts, obligations or liabilities of a limited liability company. A membership
interest is personal property and a member has no interest in specific limited liability company
property.

A promise by a member to make a contribution to a limited liability company is not enforceable

unless set out in writing and signed by the member. The Company Agreement governs
allocations of profits and losses among and distribution to members.

No foreign limited liability company may transact business in Texas unless it files an appropriate
application with the Secretary of State of Texas. A foreign limited liability company which
transacts business in Texas and fails to file such application shall be liable for all fees and
franchise taxes which would have been payable if an application had been filed.

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Assumed Business Names

Any individual, partnership or other entity, other than a corporation, limited partnership,
registered limited liability partnership or limited liability company, which regularly conducts
business in Texas under an assumed name must file an appropriate assumed name certificate
with the county clerk in each county in which such person maintains business premises (or if
there are no premises, in which business is conducted). Any corporation, limited partnership,
registered limited liability partnership or limited liability company which regularly conducts
business in Texas under an assumed name must file an appropriate assumed name certificate
with the Secretary of State of Texas and with the county clerk in each county designated by
statute. If information in a previously filed certificate becomes materially misleading, a new
certificate must be filed. A certificate remains effective for a term not exceeding ten years from
the filing date and may be renewed for successive ten-year terms. See generally Title 5 of the
BOC.

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 STATE TRADE REGULATION

Texas Antitrust Law

The Texas Free Enterprise and Antitrust Act is part of the Texas Business and Commerce Code.
This antitrust statute is similar to the federal Sherman Act, and Section 15.05 has provisions
much like Sherman Act §§ 1 and 2 and Clayton Act § 7. There is no requirement for premerger
notification akin to the federal Hart-Scott-Rodino Act.

The Texas statute covers trade and commerce occurring wholly or partly within Texas. It
explicitly requires that it be construed in harmony with federal judicial interpretations of
comparable federal antitrust statutes, to the extent that this can be done consistent with its
purpose to provide the benefits of competition to consumers in Texas. The statute also
specifically maintains most explicit federal antitrust exemptions, does not prohibit actions
approved or required by a governmental agency, and protects actions by providers of
professional services that are designed to improve quality or cut costs.

For one antitrust cause of action, predatory pricing, the Texas Supreme Court has developed a
unique, specific standard. To prove that a seller’s prices are predatory, a plaintiff must show that
(1) the seller has an objectively reasonable expectation of recouping the losses it incurs while
charging predatory prices, by charging higher prices later, and (2)(a) the seller’s prices were
below its average variable cost or (b)(i) there are substantial barriers to entry, (ii) the seller’s
prices were below its short-run profit-maximizing price and its average total cost, and (iii) the
benefits of this pricing comes from its tendency to discipline or eliminate competition and
thereby enhancing the seller’s long-term ability to reap the benefits of monopoly power. In
contrast, the federal standard is not so specific. Generally speaking, the federal courts have
required that the seller’s prices be below some appropriate measure of cost, usually marginal or
average variable cost, and that the seller had a reasonable prospect of recouping its losses.

The Texas antitrust laws may be enforced by persons who have been injured by a violation of the
statute or by the Attorney General of Texas. As under Illinois Brick, indirect purchasers lack
standing to pursue antitrust claims. The statute of limitations is four years. A copy of the
petition that initiates a private action must be sent to the attorney general. The attorney general
also has the authority to investigate possible antitrust violations using civil investigative demands
for documents and testimony. In an action brought by the attorney general to challenge a merger
or acquisition that may lessen competition, a court may order divestiture.

Covenants Not to Compete

Texas courts will enforce a covenant not to compete if it does not impose on the promisee a
greater restraint than is reasonably necessary to protect the business and good will of the
promisor. Texas courts generally will refuse to enforce a noncompete covenant rather than
rewrite it. Aside from its enforceability under that standard, a covenant not to compete may
violate the Texas antitrust law. However, a savings provision in the antitrust statute states that a
noncompete covenant remains enforceable if it is part of an otherwise enforceable agreement and
to the extent that its restrictions as to time, geographical area, and scope of activity are
reasonable and do not impose a restraint greater than is necessary to protect the business interests

9
of the promisee. No noncompete covenant has been found to violate the Texas antitrust law,
although various covenants have been fond unenforceable on grounds that they exceeded
reasonable limits, were unsupported by consideration, or were not ancillary to otherwise
enforceable agreements.

Deceptive Trade Practices

Texas has a Deceptive Trade Practices Act that is designed to protect consumers against false,
misleading, and deceptive business practices, unconscionable actions, and breaches of warranty.
The DTPA provides a cause of action for deceptive trade practices and reduces the burdens of
proof and the defenses that are part of common law fraud and breach of warranty claims. The
“laundry list” of conduct that may violate the DTPA includes making misleading statements
about the origin or quality of goods or services, passing off, false advertising, disparaging the
goods or services of others, and misrepresenting warranties. Under the DTPA, conduct may be
“unconscionable” if, to a consumer’s detriment, it takes advantage of the consumer’s lack of
knowledge, ability, experience, or capacity to a grossly unfair degree.

The DTPA provides remedies that go beyond the common law remedies for similar wrongful
conduct. A consumer who prevails in a DTPA action may obtain actual damages, damages for
mental anguish, additional damages where the violation was knowing, attorney fees, and
injunctive relief.

Theft of Trade Secrets

Texas common law allows a cause of action for theft of a trade secret. The claim requires that
the information actually have been a trade secret, that the trade secret was improperly acquired
through a confidential or contractual relationship, and that the trade secret was used without
authorization from the owner. The Texas Theft Liability Act also provides a statutory cause of
action for misappropriation of trade secrets.

Business Opportunities

Texas has a Business Opportunity Act designed to protect against false, misleading, or deceptive
practices in the marketing and sale of business opportunities. A “business opportunity” is the
sale or lease of products, equipment, supplies, or services for the purpose of enabling the
purchaser to start a business and in which the seller represents that the purchaser will profit from
the business opportunity or for which the seller will provide a marketing program or assist in
finding a location for the business. The Act requires registration with the Texas Secretary of
State prior to offering the business opportunity and disclosure of certain information to the
potential purchaser before the sale. Some business opportunities are exempt from these
requirements.

Texas does not regulate the sale of franchises as such. T he Business Opportunity Act exempts
from its coverage the sale of arrangements qualifying as franchises under federal regulations,
proved the seller files a prescribed notice with the Texas Secretary of State.

10
 TAXATION
State and Local Taxation

Businesses operating in Texas may be subject to a variety of taxes and fees imposed by the state
of Texas, as well as by various localities. The most important generally applicable Texas state
and local taxes are as follows:

Sales and Use Tax. Texas imposes a sales tax of 6.25% on retail sales of tangible personal
property, as well as on a number of services. Local sales taxes may also be imposed, up to a
maximum combined state and local rate of 8.25%. The sales tax is collected by the seller at the
point of the sale or service. Taxpayers who purchase tangible property or taxable services
outside of Texas for use in Texas are liable for a corresponding use tax.

Taxable services include amusement services, cable television services, personal services, motor
vehicle parking and storage services, the repair, remodeling, maintenance, and restoration of
tangible personal property, telecommunications services, credit reporting services, debt
collection services, insurance services, information services, real property services, data
processing services, real property repair and remodeling, security services, and telephone
answering services.

Important exemptions from the sales tax are available for occasional sales and sales of a
business, purchases of manufacturing equipment, sales for resale, purchases by exempt entities,
certain medical and food items, and certain uses of gas and electricity. Other exemptions are
also available.

Motor vehicles are not subject to the general sales and use tax. Rather, these sales are subject to
a separate motor vehicle sales and use tax at a rate of 6.25%.

Property Tax. Cities, counties, school districts, and other Texas local governments are funded
primarily through the property tax, which is imposed on real property and business personal
property. On January 1 of each year, taxable property is valued by the central appraisal district
for the country in which the property is located. Taxpayers may protest property valuations
before the central appraisal district's appraisal review board.

Each taxing unit (e.g., city, county, school district) adopts a rate each year and applies that rate to
the value of each taxpayer's property as determined by the central appraisal district. Property
taxes are generally payable by January 31 of the year following the tax year.

Franchise Tax. The franchise tax is imposed at a rate of 1% of taxable margin (0.5% for certain
entities primarily engaged in retail or wholesale trade). To determine taxable margin, the
taxpayer will deduct from its “total revenue” (gross income for federal tax purposes with certain
modifications) the greater of 1) cost of goods sold, 2) compensation, or 3) 30% of total revenue.
The tax is imposed only on the portion of taxable margin apportioned to Texas. The
apportionment process involves determining the fraction of the taxpayer’s overall receipts which
are Texas receipts, and multiplying taxable margin by that fraction. Receipts are characterized as
Texas or non-Texas receipts using rules prescribed by the Texas Comptroller of Public Accounts.

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Franchise tax is imposed on all entities, including but not limited to corporations, partnerships,
limited liability companies, and trusts, unless specifically exempted. Exemptions are available
for sole proprietorships, general partnerships owned entirely by individual persons, “passive
entities,” and certain other entity types. In order to qualify for the “passive” entity exemption, an
entity must be a limited partnership or trust (other than a business trust), and 90% of its gross
income for federal tax purposes must consist of certain types of income (including but not
limited to dividends, interest, distributive income from a partnership or limited liability
company, and capital gains from real property sales)

Taxpayers that are part of an affiliated group engaged in a unitary business must file a combined
group report and are treated as a single taxpayer. An affiliated group is a group of entities that is
commonly owned (>50% direct or indirect common ownership is required) and with respect to
which there is a synergy of operations. A synergy of operations may be evidenced by horizontal
integration, vertical integration, or strong centralized management.

Other Taxes. Other state and local taxes which may impact a business operating in Texas may
be motor fuel taxes, severance taxes, and utility gross receipts taxes.

No Personal Income Tax. Texas currently has no personal income tax.

12
 LABOR

State Labor Laws

Texas remains an employment-at-will state, which means that an employee without a contract for
a definite term may quit or be discharged without liability at any time for any reason that does
not violate a statute. A very narrow, judicially-created exception to the employment-at-will
doctrine prohibits an employer from discharging an employee solely because the employee
refused to perform an illegal act that carries criminal penalties. The Texas Legislature has
enacted the following statutes which govern labor and employment relationships within the
State:

Texas Commission on Human Rights Act (TCHRA). This statute prohibits employers with
fifteen or more employees from discriminating on the basis of race, color, disability, sex,
religion, national origin or age. The TCHRA -–which also applies to employment agencies and
labor organizations – contains a retaliation provision similar to that in the federal Title VII
statute, and it imposes a duty similar to that of the federal ADA to reasonably accommodate an
employee's disability. The TCHRA gives employees a private cause of action, but also requires
the employee to exhaust administrative remedies by filing an administrative complaint with the
Texas Commission on Human Rights and receiving a right-to-sue notice. Texas courts
frequently rely on federal case law interpreting Title VII, the ADA and the ADEA in
adjudicating TCHRA claims.

Discrimination Based on Genetic Information. An employer, labor organization or

employment agency commits an unlawful employment practice if it discriminates against an
employee or applicant on the basis of genetic information or requires employees or applicants to
submit to genetic testing. Texas law also regulates the procedures and confidentiality of genetic
testing.

Religious Accommodation. Texas law requires an employer to accommodate the religious

beliefs and practices of an employee unless doing so would constitute an undue hardship on the
employer's business. In addition, an employee may not be required to work during a period that
the employee requests to be off to attend one regular weekly religious worship service.

Unemployment Compensation Act. This statute sets forth the rules governing the
unemployment system in Texas. A totally or partially unemployed individual is eligible to
receive benefits for a specified period if he or she is available for work, is able to work, and has
registered at a Texas Workforce Commission office and met the TWC's reporting and other
requirements. An employee who was discharged for misconduct connected with the work or
who voluntarily resigned from employment is not eligible for benefits. Unemployment benefits
are paid out of an Unemployment Compensation Fund administered by the State's comptroller,
into which state employers pay taxes based on rates set by the Texas Workforce Commission.
The TWC also provides training programs, employment services and child care benefits to
eligible individuals. The right to apply for unemployment benefits may not be waived.

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Employment of Children. The Texas Labor Code contains detailed guidelines for the
employment of children under 14, limiting the occupations and hours in which children may be
employed.

Wage and Hour Provisions. The Texas Labor Code sets the minimum wage and maximum hour
regulations for those Texas employers not covered by the FLSA. The Act also contains
requirements for all Texas employers regarding the manner and time for payment of wages and
the setting of paydays, post-termination wage payments, penalties for failure to pay wages,
nonexclusive administrative procedures for filing of wage claims, and rules governing
deductions from wages. The Texas Family Code sets out the obligations of employers with
regard to deducting child support obligations from employees' wages.

"Right-to-Work" Law. Texas is a "right-to-work" state that guarantees the right to work without
regard to membership or nonmembership in a union. Employers may not require employees or
applicants to join or remain members of a labor union, nor can they prohibit employees from
seeking or maintaining union membership. The Texas Labor Code also contains regulations
governing labor unions, organizing activities and the arbitration of labor disputes and grievances.
Picketers are prohibited from physically obstructing the free entrance or exit from any premises,
and picketers may not use insulting, threatening or obscene language.

Workers' Compensation Act. Workers' compensation benefits include the payment of medical
bills and partial replacement of lost wages for employees who are injured at work or who have
work-related diseases or illnesses. Texas is unusual in that it allows private employers to choose
whether to maintain workers' compensation insurance. Employers who choose not to maintain
coverage must notify the Texas Workers' Compensation Commission and their employees, and
such employers are then subject to personal injury lawsuits from injured workers with modified
defenses. If the employer does choose to maintain workers' compensation coverage, such
coverage is the exclusive remedy for employees injured on the job without regard to the fault of
the employer. However, at the time of employment, an individual employee may elect to retain
his or her common law right of action for future on-the-job injuries rather than accepting
workers' compensation coverage. The Act specifies requirements for reporting accidents,
provisions for maintaining workplace safety, procedures for compensating employees, and an
administrative process for resolving disputes regarding eligibility or compensation.

Disclosure of Information about Employees. An employer whose authorized employee

discloses certain work-related information about a current or former employee to a prospective
employer is not civilly liable for damages proximately caused by that disclosure unless it is
proven by clear and convincing evidence that the disclosure was knowingly false or made with
malice or in reckless disregard of the truth or falsity of the information disclosed.

Arbitration Agreements. The Texas Civil Practice & Remedies Code provides for the validity of
agreements to arbitrate claims rather than litigating them in court, and sets out procedures for
arbitration.

Noncompetition Agreements. Section 15.50(a) of the Texas Business & Commerce Code
provides that an employee covenant not to compete is enforceable if it meets two basic
requirements: (a) the covenant is “ancillary to or part of an otherwise enforceable agreement at

14
the time the agreement is made,” and (b) the covenant must contain “limitations as to time,
geographical area, and scope of activity to be restrained that are reasonable and do not impose a
greater restraint than is necessary to protect the goodwill or other business interest of the
promisee.” Texas courts have made clear that for the covenant not to compete to be “ancillary to
or part of an otherwise enforceable agreement,” the employer must promise and provide
consideration to the employee that gives rise to its interest in restraining the employee (for
example, a promise to provide the employee with specialized training or access to employer
confidential information or trade secrets), and that the non-compete covenant is designed to
enforce the employee’s promise or consideration.

15
 ENVIRONMENTAL

Delegated Federal Programs

The United States Environmental Protection Agency (“EPA”) has delegated to the State of Texas
authority to administer and to enforce a number of federal environmental regulatory programs.
Pursuant to Title V of the federal Clean Air Act, 42 U.S.C. § 7661-7661f, Texas administers the
state’s federal operating permit program. Similarly, EPA has approved State Implementation
Plans delegating to the state Clean Air Act enforcement authority over a variety of federal air
programs including the Federal Standards of Performance For New Stationary Sources,
Prevention of Significant Deterioration program, and the National Emission Standards for
Hazardous Air Pollutants.

EPA has delegated to Texas authority over various hazardous waste management programs
under the Resource Conservation and Recovery Act ("RCRA") and the Hazardous and Solid
Waste Amendments of 1984, 42 U.S.C. §§ 6901-6992k, including the development of state and
regional solid waste management plans and the permitting of hazardous waste treatment, storage,
and disposal facilities.

Along with its delegated air and waste programs, Texas administers and enforces federally
delegated programs for the regulation of water pollution including the implementation of federal
technology-based standards for the regulation of discharges and the permitting of point source
discharges under the federal Clean Water Act, 33 U.S.C. §§ 1251-1387. In addition, Texas has
delegated authority to administer and to enforce the state’s public drinking water systems
program and underground injection control program pursuant to the federal Safe Drinking Water
Act, 42 U.S.C. §§ 300f-300j-26.

State Programs

Pursuant to the Texas Solid Waste Disposal Act, TEX. HEALTH & SAFETY CODE §§ 361.001-.540,
Texas has developed programs regulating the management of industrial solid waste that impose
restrictions on the disposal of solid waste not otherwise regulated as hazardous waste under
RCRA. Similarly, Texas has implemented a program for the regulation of aboveground storage
tanks that mirrors the state’s underground storage tank program. TEX. WATER CODE
§§ 26.341-.359. Waste from oil and gas exploration, development, or production activities is
regulated primarily by the Railroad Commission of Texas under a memorandum of
understanding with the Texas Commission on Environmental Quality (“TCEQ”). 30 TEX.
ADMIN. CODE § 3.30.

With regard to air permitting, the state requires persons planning to construct new facilities or to
modify existing facilities to acquire preconstruction permits or to satisfy the conditions for a
permitting exemption prior to beginning such work on the facility. 30 TEX. ADMIN. CODE
§ 116.110. EPA has approved some of Texas’ State Implementation Plans, but a substantial “SIP
gap” developed in the state; as Texas revised its plans, EPA failed to either approve or deny
many of those revisions for more than a decade. After an industry group sued EPA to act on the
plans, EPA agreed to a review schedule in settlement for the suit. In 2010, EPA disapproved
several of the state’s New Source Review (“NSR”) programs, including the Flexible Permit
program, the Qualified Facilities program, the Pollution Control Project Standard Permit

16
program, and the NSR Reform regulations. TCEQ has amended, or has proposed amendments
to, the disapproved programs. Any amendments to the programs must further be submitted to
EPA for approval or disapproval. EPA has indicated that it may take federal enforcement actions
against businesses that use the disapproved programs and has urged all such businesses to seek
permits under other, SIP-approved authorization mechanisms.

In 2009, EPA also began issuing objections to businesses’ operating permits required by Title V
of the federal Clean Air Act. EPA’s objections reflect programmatic concerns with the way
TCEQ issues Title V permits--including alleged deficiencies in incorporation by reference of
other air permits. TCEQ and EPA have been in discussions for ways to address EPA’s concerns
with the Texas Title V program.

The state has developed an independent state Superfund program designed to address
contaminated sites that do not qualify for federal cleanup under the federal Superfund program.
TEX. HEALTH & SAFETY CODE §§ 361.131-.137, .181-.202.

Texas has developed hazard communication and community right-to-know programs modeled on
similar federal laws. Under the Texas Hazard Communication Act, TEX. HEALTH & SAFETY
CODE §§ 502.001-.019, owners and operators of regulated facilities in the state must provide
information to their employees regarding the hazards of chemical exposure in the workplace.
Similarly, under the Manufacturing Facility Community Right-To-Know Act, TEX. HEALTH &
SAFETY CODE §§ 505.001-.016, the Public Employer Community Right-To-Know Act, TEX.
HEALTH & SAFETY CODE §§ 506.001-.017, and the Non-Manufacturing Facilities Community
Right-To-Know-Act, TEX. HEALTH & SAFETY CODE §§ 507.001-.013, owners and operators of
regulated facilities must provide information regarding chemical hazards to the public and
emergency responders.

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 INTELLECTUAL PROPERTY

Trademarks and Service Marks

Statute. Any person who has used a mark in connection with goods or services in Texas may
apply for registration upon application with the Secretary of State and payment of a fee of $50.
The items excluded from registration parallel those found in the Federal Trademark Act.
Registration is for a term of ten years, with successive ten-year renewal periods available.
Registration of the mark is constructive notice of the registrant’s claimed rights in the mark and
is prima facie proof of ownership, validity, and the exclusive right to use the mark in Texas.
Registration entitles the registrant to damages and an injunction for any infringement of the
mark. There is no provision in the statute allowing the recovery of attorneys’ fees or costs.

Common Law. In Texas, palming off, which falls within the realm of unfair competition, is
similar to, but broader than, trademark infringement. It is the use or simulation by someone of
the name, symbol, or device of a business rival in such a manner as is calculated to deceive and
cause the public to trade with the second when they intended to have traded with the first. The
scope of this protection is broader than that provided by statutory trademark law because it
considers the total physical image of the product and the name together. Statutory trademark law
only provides the holder of the trademark an exclusive right to use the mark to identify and
distinguish his product or service. The remedies for unfair competition include injunctions and
monetary damages including lost profits and punitive damages.

Anti-dilution Statute. Although Texas’ anti-dilution statute follows the Model State Trademark
Act, it offers broader protection than federal law because it allows injunctive relief regardless of
whether there is competition between the parties or a likelihood of confusion as to the source of
goods or services. The owner of a distinctive mark may seek to enjoin any act likely to dilute the
distinctive quality of a mark, regardless of whether the mark is registered or whether there is
competition between the parties or confusion between the marks.

Trade Names
Any person, including individuals, corporations, partnerships, and other legal entities, doing
business under an assumed name must file a certificate with the county clerk, and entities created
by filing with the Secretary of State (e.g., corporations, limited liability companies or limited
partnerships) must file an additional certificate with the Secretary of State. The certificate
provides information such as the true name and address of the person and the business to be
conducted. A new certificate must be filed within 60 days of any material change of the
information contained in the existing certificate.

Trade Secrets
Texas provides common law trade secret protection in civil matters and statutory protection in
the criminal context, but it has not adopted the Uniform Trade Secrets Act.

Criminal Statute. A trade secret is defined as any scientific or technical information, design,
process, procedure, formula, or improvement that has value and that the owner has taken
measures to prevent from becoming available to persons other than those selected by the owner

18
to have access for limited purposes. A person commits a third-degree felony in Texas if the
person knowingly steals a trade secret, makes a copy of an article representing a trade secret, or
communicates or transmits the trade secret without the owner’s consent.

Common Law. Texas provides for common law protection of trade secrets. The owner of a
trade secret may make the trade secret known to others subject to the contractual duty not to use
or disclose the secret.

Ownership of Employee-Developed Inventions

Statute. There is no Texas statute governing ownership of inventions made by employees.

Common Law. If an employee is employed to devise or perfect a particular invention, then the
rights in the results of the work for which the employee was employed are the property of the
employer. Even where the employee was hired merely to “invent,” without specifying a
particular result, the employer is likely to be treated as owner of the rights in inventions made in
the scope of employment. With respect to patents, even where the employer is found not to own
the patent in the invention, as when the invention is made outside the scope of employment and
not subject to an implied agreement to assign, the employer will receive a “shop right,” a royalty
free license to use any inventions of employees made on the employer’s time, or with the
employer’s facilities and materials. It is unclear whether the “shop right” applies to trade secrets.

Right of Publicity
Statute. Texas provides statutory protection for the use of a deceased individual’s name, voice,
signature, photograph, or likeness. Under the statute, an individual has a freely transferable,
survivable property right in the use of the individual’s name, voice, signature, photograph, or
likeness after the death of the individual. The statute excepts noncommercial uses and certain
media enterprises. Individuals may register the property right, and registration is deemed prima
facie evidence of a valid claim to a property right. Only the registered owners of the right,
executors, administrators, or court-appointed guardians may exercise the property right during
the first year following the death of the individual. The right expires on the fiftieth anniversary
of the death of the individual, but if the individual has not transferred the right and there is no
surviving spouse, child, grandchild, or parent, the right expires on the first anniversary of death.
Liability includes actual damages, or $2,500, whichever is greater; profits from the unauthorized
use; exemplary damages; and attorney’s fees, expenses, and costs.

Common Law. Texas courts have recognized a common law right of privacy, including the
commercial appropriation of a person’s name or likeness without consent. Actual damages are
recoverable for mental suffering and anguish resulting from intentional invasion of the right of
privacy, regardless of the absence of physical injury. Exemplary damages may be awarded if the
tort was committed with malice.

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 DISPUTE RESOLUTION

State Court System. In the Texas court system, there are two basic types of courts: trial courts;
and appellate courts. A trial court has one judge. By contrast, appellate courts sit in panels and
hear appeals in cases that have been previously tried in the trial courts. Texas is divided into
nine administrative judicial regions. Each region has a presiding judge appointed by the
Governor for a four-year term. The duties presiding judge’s duties include promulgating and
implementing regional rules of administration, advising local judges on judicial management,
recommending changes to the Supreme Court for the improvement of judicial administration,
and acting for local administrative judges in their absence. The presiding judge also has the
authority to assign visiting judges to hold court when necessary to dispose of accumulated
business in the region.

State Trial Courts. Five different types of trial courts exist in Texas: municipal courts; justice
of the peace courts; constitutional county courts; statutory county courts; and district courts.
Which trial court has jurisdiction depends on the subject matter of the case, the amount in
controversy, and the relief sought. In some instances, there is concurrent jurisdiction among
courts.

Texas Municipal Courts. The Texas Legislature has created municipal courts in each of the
incorporated cities of the State. Municipal courts operate in more than 900 Texas cities and
towns. These courts have original and exclusive jurisdiction over violations of city ordinances
and, within the city limits, concurrent jurisdiction with justice of the peace courts over Class C
misdemeanor criminal cases where the punishment upon conviction is by small fine only. When
city ordinances relating to fire safety, zoning, public health, or sanitation are violated, fines of up
to $2,000 may be charged, when authorized by the governing body of the city. Municipal judges
may issue search or arrest warrants. These courts do not have jurisdiction in most civil cases, but
do have limited civil jurisdiction in cases that involve owners of dangerous dogs.

Texas Justice of the Peace Courts. The Texas Constitution requires that each county in the
State establish between one and eight justice of the peace precincts, based on the population of
the county. Also, depending on the population of the precinct, either one or two justice of the
peace courts are established in each precinct. There are approximately 822 justice of the peace
courts in Texas. Justices of the peace are elected in partisan elections and serve four-year terms.

Justice of the peace courts have original jurisdiction in Class C misdemeanor criminal cases,
which are minor offenses. These courts also have jurisdiction of minor civil matters. Unless
another court has been granted jurisdiction over the subject matter of an action, a justice court
has original exclusive jurisdiction over cases in which there is an amount in controversy of $200
or less. Justice courts also have exclusive subject-matter jurisdiction over forcible entry and
detainer cases, so long as the matter does not require a trial of title to land.

These courts also share concurrent jurisdiction with the county and district courts in cases in
which the amount in controversy is between $200 and $5000, exclusive of interest. A justice
court, however, has no authority to issue injunctive relief. A justice of the peace may issue

20
search or arrest warrants and may serve as the coroner in counties where there is no provision for
a medical examiner. These courts also function as small-claims courts.

Constitutional County Courts. The Texas Constitution provides that each of the 254 counties of
the State has a single county court presided over by a county judge. These judges are elected in
partisan elections and serve four-year terms. Unless a case is specifically assigned to another
court because of its subject matter, a constitutional county court shares concurrent jurisdiction
with justice of the peace courts, county courts at law, and district courts in civil cases where the
amount in controversy is between $200 and $10,000 exclusive of interest. Also, the
constitutional county courts generally hear the probate cases filed in the county, unless the
county has a statutory probate court. Constitutional county courts have exclusive original
jurisdiction over all misdemeanor criminal cases with fines greater than $500 or involving a jail
sentence.

Texas statutes deny constitutional county courts jurisdiction in the following types of suits: (1) to
recover damages for slander or defamation of character; (2) to enforce liens on land; (3) on
behalf of the state of Texas for escheat; (4) for divorce; (5) for forfeiture of corporate charters;
(6) for the trial of rights to property valued at $500 or more and levied on under a writ of
execution, sequestration, or attachment; (7) regarding eminent domain; or (8) for recovery of
land.

Constitutional county courts have appellate jurisdiction in cases appealed from justice of the
peace and municipal courts where the judgment rendered exceeds $20, except in counties where
county courts at law have been established. Unless the appeal is one from a designated
municipal court of record (trial proceedings are recorded by a court reporter), the appeal takes
the form of a trial de novo (a completely new trial). Because the courts of appeals require a
minimum judgment or amount in controversy of $100, the county courts are often the courts of
last resort for small claims.

County Courts at Law. Because the Texas Constitution limits each county to a single county
court, the Legislature has created statutory county courts at law in the larger counties to aid the
single constitutional county court in its judicial functions. Judges sitting in the county courts at
law are elected in partisan elections and serve four-year terms.

The legal jurisdiction of these special county-level trial courts varies considerably and is
established by the statute that creates the particular court. In order to determine the exact
contours of a particular statutory court’s jurisdiction, counsel must first consult the specific
statute to determine what it provides about a statutory county court’s jurisdictional role in the
county in which it operates. If a specific provision creating a county court at law conflicts with a
general provision in Government Code concerning county courts at law, the specific provision
controls.

Generally, statutory county courts have (1) concurrent jurisdiction with district courts in civil
cases where the amount in controversy exceeds $500 but does not exceed $100,000 (excluding
interest, statutory or punitive damages and penalties, and attorney’s fees and costs); (2)
concurrent jurisdiction with district courts over appeals of final rulings and decisions of the

21
Texas Workers Compensation Commission, regardless of the amount in controversy; and (3)
concurrent jurisdiction with district courts in eminent domain cases. Also, unless a county has a
statutory probate court, a statutory county court has concurrent jurisdiction with the
constitutional county court over probate matters. County courts at law have appellate
jurisdiction in cases appealed from justice of the peace and municipal courts where the judgment
rendered exceeds $20. Unless the appeal is one from a designated municipal court of record the
appeal takes the form of a trial de novo. Because the courts of appeals require a minimum
judgment or amount in controversy of $100, the county courts are often the courts of last resort
for small claims.

Unless otherwise provided by statute, however, statutory county courts have no jurisdiction in
the following cases: (1) a suit to recover damages for slander or defamation of character; (2) a
suit for enforcement of a lien on land; (3) a suit on behalf of the state of Texas for escheat; (4) a
suit for divorce; (5) a suit for the forfeiture of a corporate charter; (6) a suit for the trial of a right
to property valued at $500 or more and levied on under a writ of execution, sequestration, or
attachment; (7) an eminent domain suit; or (8) a suit for recovery of land.

Texas District Courts. The district courts, which are almost 500 in number, are Texas’ trial
courts of general jurisdiction. The geographical area served by each court is established by the
Legislature, but each county must be served by at least one district court. These judges are
elected in partisan elections and serve four-year terms. In sparsely populated areas of the State,
several counties may be served by a single district court, while an urban county may be served
by many district courts.

The district court is the preeminent Texas trial court. District courts have original jurisdiction in
the following types of cases: (1) all felony criminal cases; (2) divorce cases; (3) cases involving
title to land; (4) election contest cases; (5) civil matters in which the amount in controversy (the
amount of money or damages involved) is $200 or more; and (6) any matters where jurisdiction
is not placed in another trial court. While most district courts try both criminal and civil cases, in
the more populated counties the courts may specialize in civil, criminal, juvenile, or family-law
matters.

Jury trials are available in civil cases upon demand. Defendants in criminal cases or the parties
in civil lawsuits have the right to a trial by either six or twelve local citizens. Except in capital-
murder cases, the right to a trial by jury may be waived.

Proceedings. The Texas Rules of Civil Procedure govern all civil proceedings in the justice,
county, and district courts. The Texas Supreme Court promulgates those Rules, which have the
same legal effect as statutes. Also, judicial regions and individual courts have adopted local
rules that vary extensively.

In Texas, a suit commences when a plaintiff files a petition. After the plaintiff files that petition,
the clerk of the court issues a citation. The plaintiff is responsible for delivering both the citation
and a copy of the petition to the defendant, thereby ensuring that the defendant receives his
constitutionally required right of notice. There are strict rules governing this procedure. In
Texas, one can serve process on individuals by (1) delivering to the defendant, in person, a true

22
copy of the citation with the date of delivery endorsed thereon with a copy of the petition
attached or (2) mailing to the defendant by registered or certified mail, return receipt requested, a
true copy of the citation with a copy of the petition attached thereto. Also, upon motion
supported by an affidavit stating the location of defendant’s business, usual place of abode, or
other place where defendant can be found, and stating specific facts showing that the above
mentioned methods have not been successful at the address mentioned in the affidavit, the court
may authorize service: (1) by leaving a true copy of the citation and a copy of the petition with
anyone over sixteen years of age at the location specified in such affidavit; or (2) in any other
manner that the affidavit or other evidence before the court shows will be reasonably effective to
give the defendant notice of the suit. Service upon partnerships, domestic and foreign
corporations, state agencies, and county and city political bodies have similarly detailed rules for
service of process to follow to ensure valid service of process.

Once the defendant receives proper service, he must make an appearance by 10:00 am on the
Monday following the expiration of 20 days after service (10 days in justice court.) To preserve
objections to personal jurisdiction a defendant must file a special appearance before any other
pleading. Also, challenges to venue must be filed before any other pleading except a special
appearance. Generally though, the first pleading filed by a defendant is an answer. Unlike
federal court, in Texas the answer can take the form of a general denial. A general denial denies
all of the plaintiff’s allegations and places the burden of proof on the plaintiff. In some instances
though a defendant must make a special denial, such as when plaintiff has claimed that all
condition precedents have been met or when a verified denial is required by Texas Rule of Civil
Procedure 93.

The defendant at this time should also assert any defenses to plaintiff’s allegations and allege any
counter-claims that may exist against the plaintiff. The plaintiff need not file a general denial in
response to defendant’s counter-claims, but must file a reply if he seeks to assert the verified
denials contained in TRCP 93, challenge whether a condition precedent to defendant’s counter-
claims has been met, or assert affirmative defenses.

Once this process, called “pleading,” is completed, the parties engage in discovery. The purpose
of modern discovery is to eliminate any surprise in the adversarial process. Thus, anything
relevant to the subject matter of the suit that is not privileged is within the scope of discovery.
Information obtained through discovery need not be admissible at trial as long as it is reasonably
calculated to lead to admissible evidence.

State Appellate Courts. In Texas, there are three levels of appellate courts: the Courts of
Appeals; the Court of Criminal Appeals; and the Texas Supreme Court. The 14 courts of appeals
have intermediate jurisdiction in both civil and criminal cases appealed from district and county
courts. There are presently eighty judges authorized for these courts, each elected for a six-year
term by voters in their court of appeals district. The Court of Criminal Appeals is composed of 9
judges each elected to a six-year term in a statewide election. The Court of Criminal Appeals is
the highest state court for criminal matters. It sits in Austin and has the power to take
discretionary review of all criminal cases decided by the courts of appeals. The Texas Supreme
Court is the highest state court for civil matters. The Supreme Court is composed of nine judges
elected in statewide election for six-year terms. The jurisdiction of the Texas Supreme Court is

23
limited by the Texas Constitution and by statute. There are specific instances when the Texas
Supreme Court can exercise its appellate jurisdiction.

Texas Courts of Appeals. Each court of appeals has jurisdiction in a specific geographical
region of the State. Each court is presided over by a chief justice and has at least two other
justices. The specific number of justices on each court is set by statute and ranges from three to
thirteen. A panel of three justices usually hears appeals in the courts of appeals, unless an en
banc hearing is ordered. In an en banc hearing, all the justices of that court hear and consider the
case. Currently, the Texas Legislature has authorized 80 justices among these courts.

The courts of appeals have appellate jurisdiction in criminal cases, except in criminal cases in
which the death penalty has been assessed. The appellate jurisdiction does not, however,
embrace any case appealed from an inferior court (municipal court or justice of the peace court)
to a county court where the fine imposed by the county court in question does not exceed $100,
unless the sole issue is the constitutionality of the statute or ordinance on which the conviction
was based.

A court of appeals has appellate jurisdiction within its territorial limits over final judgments in
civil cases where the county or district courts have or assume original jurisdiction and the
judgment or the amount in controversy exceeds $100. In the following instances the decisions of
the courts of appeals are final and not appealable to the Texas Supreme Court: (1) all cases of
contested elections other than those for statewide offices, except when the validity of a statute is
questioned by the decision; (2) all appeals from interlocutory orders appointing receivers or
trustees, or such other interlocutory appeals allowed by law, except an interlocutory order
denying a media defendant’s motion for summary judgment concerning a prior restraint; (3) all
civil cases appealed from the county court or from a district court when under the Texas
Constitution a county court would have had original or appellate jurisdiction to try it, except in
probate matters, in cases involving the revenue laws of the state, or in cases involving the
validity or construction of a statute; (4) all appeals from orders or judgments in suits in which a
temporary injunction has been granted or refused or when a motion to dissolve has been granted
or overruled; and (5) all other cases except when appellate jurisdiction is specifically given to the
Texas Supreme Court by statute and is not made final in the court of appeals.

If, however, the justices of a court of appeals disagree on a question of law material to the
decision, or if one court of appeals holds differently from a prior decision of another court of
appeals or from the Texas Supreme Court, the Texas Supreme Court has jurisdiction in cases that
the courts of appeals otherwise have final judgment.

A court of appeals may issue writs for the general supervision and control over proceedings of
lower courts in its own jurisdiction.

Court of Criminal Appeals. The Court of Criminal Appeals is Texas’ highest court for criminal
cases. The Court has statewide final appellate jurisdiction of criminal cases and makes rules of
post-trial and appellate procedure for criminal cases. Most of the cases heard by this Court are
appeals from one of the fourteen intermediate courts of appeals. An important exception is that
appeals in cases where the death penalty is imposed are made directly from the trial court to the

24
Court of Criminal Appeals. This Court has the authority to issue such orders as may be
necessary to enforce its jurisdiction and judgments.

Texas Supreme Court. The Texas Supreme Court is the highest court for civil and juvenile
cases in Texas. The Court has original jurisdiction to determine certain legal questions involving
a violation of a legal duty by any officer of the state government, except the governor or certain
judicial officers. The Court’s appellate jurisdiction extends to questions of law, but does not
encompass questions of fact. Accordingly, the Court is precluded from reviewing questions of
“insufficient evidence.” The Court is limited to reviewing “no evidence” or “as a matter of law”
points of error, but may consider questions of fact that are necessary for it to determine whether
it has jurisdiction.

The Court may act only if a court of appeals has exercised its appellate jurisdiction, and then
only in the following cases: (1) where the judges on a court of appeals disagree on any question
of law material to the decision; (2) where one of the courts of appeals holds differently from a
prior decision of the Supreme Court or another court of appeals on any question of law material
to a decision of the case; (3) involving the validity or construction of a statute necessary to a
determination of the case; (4) involving the revenue of the state; (5) where the Railroad
Commission is a party; and (6) where it appears that an error of law was committed by the court
of appeals, and that error is of such importance to the jurisprudence of the state that, in the
opinion of the Supreme Court, it requires correction, but excluding cases in which the
jurisdiction of the court of appeals is made final by statute.

By statute, the Texas Supreme Court is proscribed from hearing cases where the amount in
controversy is $5,000 or less. This restriction does not apply, however, to cases involving
probate, revenue laws, or the construction or validity of a statute. In such situations the Court
may exercise its jurisdiction under the error of law standard even though the amount in
controversy requirement has not been met.

The Court may hear a direct appeal from any order of any trial court granting or denying an
interlocutory appeal or permanent injunction on the ground of constitutionality or
unconstitutionality of any Texas statute. The Court also has the power to issue all writs
necessary to enforce its jurisdiction as well as writs of mandamus against any district judge,
statutory or constitutional county judge, statutory probate judge, a court of appeals or justice
thereof, and any state officer, except the governor. The Court’s mandamus jurisdiction extends
to cases over which it would not have appellate jurisdiction.

In addition to its adjudicative functions, the Texas Supreme Court has many administrative
duties. It is responsible for the efficient operation of the Texas judicial system. The court makes
the rules of practice and procedure governing trials and appeals in civil and juvenile cases in the
State, the rules of administration for the Texas judicial system, and the rules for the operation of
judicial agencies.

Alternative Dispute Resolution in Texas. Parties seeking alternative dispute resolution have a
myriad of options in Texas. In the state’s effort to support alternative dispute resolution, Texas
passed the Alternative Dispute Resolution Procedures Act, thereby allowing a court, upon its
own motion or upon a motion of a party, to refer a pending dispute to alternative dispute

25
resolution. Texas has also passed statutes providing for the judicial enforcement of arbitration
agreements and awards.

There is not currently mandatory alternative dispute resolution or arbitration in Texas. The
Alternative Dispute Resolution Act, however, makes it the responsibility of all trial and appellate
court judges and administrators to encourage the peaceable resolution of disputes and the early
settlement of pending litigation through voluntary settlement procedures. When the court or the
parties do choose to engage in alternative dispute resolution, five options exist: mediation; mini-
trial; moderated settlement conference; summary jury trial; and arbitration. Parties engaging in
court-ordered arbitration must decide before arbitration begins whether the arbitrator’s ruling
will be binding. If the parties so decide, the arbitrator's award is enforceable in the same manner
as any other contractual obligation. Also, if the parties engaging in alternative dispute resolution
reach a settlement, the settlement is enforceable as a contractual obligation and can be
incorporated into the court’s final decree.

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 FINANCING

Tax-Exempt Financing

Tax-exempt financing may be available through various governmental and quasi-governmental

entities for manufacturing and other projects that promote economic development or other goals
targeted by the legislature. The most commonly encountered source of such financing is the
issuance of industrial revenue bonds ("IRBs"), exempt facility bonds ("EFBs") and sales tax
bonds ("STBs") pursuant to the Development Corporation Act of 1979 (as amended, the "Act").
As identified below, certain types of bonds must receive a reservation under the volume
limitation (the "Volume Cap") imposed by the federal Tax Reform Act of 1986 on the aggregate
principal amount of "private activity bonds" that may be issued within the State of Texas during
any calendar year. Currently, the State of Texas' Bond Review Board holds its annual lottery for
Volume Cap allocation in October of every year.

IRBs. IRBs may be utilized to finance land and depreciable property for facilities that
manufacture, produce or process one form of tangible personal property into another form of
personal property. IRB issuances are limited to a maximum amount of $10,000,000 (subject to
reduction for other capital expenditures in the jurisdiction of the issuer), subject to a total
company limit of $40,000,000 nationwide and are limited by restrictions on eligible project costs
and use of proceeds. IRB issuances also must reserve a portion of the Volume Cap.

Exempt-Facility Bonds. EFBs may be issued to finance certain types of specified facilities. The
restrictions on such issuances depend on the type of facility being financed. EFBs may be issued
for airports, dock and wharf facilities, mass commuting facilities, high-speed inter-city rail
facilities and qualified hazardous waste facilities (including certain training and storage
facilities) without any limit on the amount of the issue or a reservation under the Volume Cap.
While such facilities must be governmentally owned, they may be leased by or subject to
management contracts with the business. EFBs for water, sewage and solid waste facilities,
qualified residential rental projects, facilities for the local furnishing of electricity or gas and
local district heating or cooling facilities must reserve a portion of the Volume Cap.

Sales Tax Bonds. STBs may only be issued by cities that have passed a local sales and use tax
for economic development in accordance with the Act. In addition to manufacturing and
industrial projects, STBs may also be issued for commercial, recreational, infrastructure, and
other types of projects that fit within the guidelines set forth in Section 4A and/or 4B of the Act.
STBs may be issued without limitation as to amount (other than inherent limitations imposed by
the availability of sales and use tax proceeds) and may not require a reservation of a portion of
the Volume Cap. Ineligible projects include for-profit hospitals, multi-family projects and
projects that provide municipal services.

Commercial Banking

In Texas, state regulation of financial institutions falls within the jurisdiction of the Finance
Commission, and within the Commission, state banks, Texas offices of foreign banks, trust
companies and money service businesses are regulated by the Banking Commissioner, savings

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and loan associations and savings banks are supervised by the Savings and Mortgage Lending,
and consumer lending falls within the jurisdiction of the Consumer Credit Commissioner. In the
case of banks, offices of foreign banks, and savings and loans, state regulation is cumulative of
federal deposit insurance regulation and holding company regulation. Most state regulatory
statutes are contained in the Texas Finance Code.

Generally banks may receive and pay deposits, discount and negotiate promissory notes, borrow
or lend money with or without security and interest, invest and deal in securities, buy and sell
exchange, coin, and bullion, and exercise incidental powers as necessary to carry on the business
of banking; act as agent, registrar or transfer agent and in that capacity receive and disburse
money and transfer securities; act in fiduciary capacity (if regulators approve their exercise of
fiduciary powers) as guardian, receiver, executor, administrator or trustee; and/or engage in any
other activity determined by the Texas Banking Commissioner to be closely related to banking.
The appointment of managers (directors and officers) is subject to regulatory approval, as are
transactions with affiliates and corporate mergers and combinations. Acquisition of control of
financial institutions or financial institution holding corporation is regulated. Generally, total
loans and extensions of credit by a state bank to a person outstanding at one time may not exceed
25% of the bank’s capital and certified surplus. For a bank, real estate may not be acquired
except to be used as a banking facility or in satisfaction of indebtedness. A state bank may
establish and maintain branch offices at any location on prior written approval of the Banking
Commissioner.

In keeping with national trends, banks are permitted to affiliate with certain securities
companies, subject to strict limitations. Branches of out-of-state banks are permitted, subject in
the case of mergers to certain limitations on the particular bank’s percentage of total deposits in
the state (although, through October 2010, the deposit-limitation had not yet been invoked to
limit the size of any Texas branches of any out-of-state banks).

The Texas Constitution, Art. XVI, §16(c) grants to state banks the same rights and privileges that
are or may be granted to national banks domiciled in Texas, subject to regulatory notice and
approval.

State Blue Sky and Other Securities Issues

The Texas Securities Act (the "Securities Act"), codified in Article 581 et seq. of Title 19 of the
Revised Civil Statutes of the State of Texas, regulates offers and sales of securities in Texas.
Like the federal securities laws, the Securities Act is designed to protect investors by, among
other things, regulating the offer and sale of securities through registration, disclosure and other
substantive requirements, and prohibiting fraudulent, manipulative and deceptive practices in
connection with the offer or sale of securities.

In general, offers and sales of securities in Texas are prohibited, regardless of the size of the
offering, unless the security is registered with the Texas State Securities Board (the “Securities
Board”) or the security or the particular transaction is exempt under the Securities Act. If an
exemption is not available, an offer or sale of a security may not be made unless it is registered.
Even if an exemption is available, notice or other filings (and possibly filing fees) may be

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required, depending on the type of exemption. Note that state registration requirements have
been preempted by federal legislation for certain types of securities and transactions.

Securities exemptions are divided into two categories. “exempt securities;” and “exempt
transactions.” Exempt securities relate to the nature of the securities offered, such as a security
issued by a regulated public utility. The Securities Act sets forth six types of exempt securities:
railroad and public utility securities; non-profit corporation securities; securities listed on one of
several stock exchanges or the NASDAQ National Market System; commercial paper; debt
securities secured by deposit with a trustee of certain entities including a state or the U.S.
Government; and debt securities of religious, charitable or benevolent corporations.

Exempt transactions concern the particular nature of the transaction by which the securities will
be offered and sold. The Securities Act specifies twenty categories of securities transactions that
are exempt from registration and provides for additional exemptions as prescribed by rule,
regulation or order of the Securities Board. Examples of exempt transactions indentified in the
Securities Act include transactions made pursuant to private offerings to a limited number of
individuals during a twelve-month period; offers and sales to certain institutions; offers to an
issuer's existing security holders (if no commission or other remuneration is paid for soliciting
the security holders); and sales of securities under employee benefit plans and several non-issuer
exemptions, among others. Certain of the exempt transactions require the sale to be made
without any public solicitation or advertisement. The Rules of the Securities Board published in
Title 7 of the Texas Administrative Code contain additional transactional exemptions and
clarification of several provisions of the Securities Act.

Any person who offers or sells a security in violation of the Securities Act's registration
provisions, who knowingly makes material misstatements or omissions in connection with the
offer, sale or purchase of a security, or who otherwise engages in fraudulent conduct is subject to
civil and felony criminal sanctions as well as administrative orders and fines.

Dealers, agents, investment advisers and investment advisor representatives must register with
the Securities Board prior to selling securities or rendering investment advice in Texas, unless
exemptions or federal preemption provisions apply. Such individuals and firms are also
prohibited from engaging in fraudulent practices and may have their registrations revoked or
other penalties imposed upon them for violations of the Securities Act.

For more information on registration requirements and exemptions, the Securities Act, and the
rules, regulations and orders of the Securities Board, see the Texas State Securities Board
website:
http://www.ssb.state.tx.us/Securities_Registration_Exemptions_and_Federal_Covered_Securities
/.

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 REAL ESTATE

State Real Estate Law

The State of Texas provides by statute that an alien has the same real and personal property
rights as a United States citizen. There are, however, numerous federal and state laws that affect
real estate conveyances involving foreign citizens and entities.

Typically, purchasers of real property conduct a due diligence review of the property pursuant to
the terms of a purchase and sale agreement (also sometimes called an earnest money contract).
The scope of the due diligence review can vary widely according to the transaction, but usually
includes the examination of the state of title of the property, a survey of the property, an
environmental report and any laws and local ordinances affecting the property, including zoning
ordinances, if any. Purchasers of real property ordinarily obtain a title commitment from a title
company. The title commitment sets forth the state of title to the property, including the record
owner, any recorded encumbrances such as easements and restrictive covenants, and any
recorded liens affecting the property. With the payment of the premium to the title company and
the satisfaction of any requirements of the title company, purchasers obtain a title policy that
insures the purchaser against certain losses that occur if the state of title is not as set forth in the
policy, up to the policy limit. The State Bar of Texas has developed many standardized forms
that may be used in real estate purchase transactions, including deeds, assignments and bills of
sale.

City and county ordinances enacted in accordance with state statutes, including subdivision,
zoning, building and environmental ordinances, affect the development of real property and must
be reviewed prior to undertaking development activities.

In Texas, a mortgage of real property is typically in the form of a deed of trust pursuant to which
a borrower conveys the property in trust to a trustee (usually a nominee of the lender) as security
for a debt owing to the lender. The borrower retains title to the property and the lender obtains a
lien. A deed of trust typically includes a power of sale clause, which permits a non-judicial
foreclosure in the event of a default by the borrower.

Both real and personal property are generally subject to ad valorem taxes.

In Texas, the subsurface mineral estate may be separated from the surface estate and conveyed
independently. As a general principle, the owner of the mineral estate owns the dominant estate,
meaning that, absent any agreement to the contrary between the estate owners, the owner of the
mineral estate has the right to use the surface in a reasonable manner to extract subsurface
minerals.

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 STATE AGENCIES

Attorney General
300 W. 15th Street
Austin, Texas 78701
Phone: 512-463-2100

Banking, Department of
2601 N. Lamar Blvd.
Austin, Texas 78705-4294
Phone: 512-475-1300

Comptroller of Public Accounts

LBJ Building, First Floor
111 E. 17th Street
Austin, Texas 78774-0100
Phone: 512-463-4000

Economic Development, Department of

1700 N. Congress Avenue
Austin, Texas 78701
Phone: 512-936-0100

Environmental Quality, Texas Commission on

(formerly Natural Resource Conservation Commission)
12100 Park 35 Circle
Austin, Texas 78753
Phone: 512-239-1000

Insurance, Department of
333 Guadalupe
Austin, Texas 78701
Phone: 512-463-6169

Secretary of State
1100 Congress, Suite 1E.8
Austin, Texas 78701
Phone: 512-463-5770

Securities Board
208 E. 10th Street, 5th Floor
Austin, Texas 78701
Phone: 512-305-8300

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