Does a Pre-Existing Choice-of-Law Clause Survive When You Convert an Out-of-State Entity to a Texas LLC?
Does a Pre-Existing Choice-of-Law Clause Survive When You Convert an Out-of-State Entity to a Texas LLC?
Wilson Whitaker Rynell | Business & Corporate Attorneys
Companies frequently convert an out-of-state entity into a Texas limited liability company under the Texas Business Organizations Code (TBOC). The conversion process itself is generally straightforward. A less obvious question is what happens to the governing documents that already exist—particularly a choice-of-law provision that selects the law of another state.
This post addresses a focused but common issue: Does a choice-of-law clause in an existing operating agreement remain enforceable once that entity converts to a Texas LLC?
The Statutory Starting Point for Entity Conversion
Under TBOC § 10.106, when a conversion takes effect, the converted entity continues as the same entity. The governing documents of the converting entity continue in effect unless and until they are amended or restated. In practical terms, the operating agreement does not automatically disappear or get rewritten by the conversion.
That continuity does not, by itself, resolve whether a choice-of-law clause pointing to another jurisdiction remains valid once the company is a Texas entity.
How Texas Courts Treat Choice-of-Law Clauses
Texas courts generally enforce contractual choice-of-law provisions. The analysis typically follows Restatement (Second) of Conflict of Laws § 187. A chosen law will be applied unless:
- The chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the choice, or
- Application of the chosen law would violate a fundamental policy of a state that has a materially greater interest in the particular issue.
Texas courts have repeatedly upheld choice-of-law clauses in commercial agreements when the parties had a reasonable basis for the selection and the chosen law does not conflict with a fundamental Texas policy. See, for example, DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990), and subsequent intermediate appellate decisions applying the same framework.
WHEN AN OUT-OF-STATE ENTITY CONVERTS TO A TEXAS LLC,
TWO THINGS ARE TRUE AT THE SAME TIME:
- The pre-conversion operating agreement continues in effect under TBOC § 10.106.
- The entity is now a Texas entity for most internal-affairs purposes.
When an out-of-state entity converts to a Texas LLC, two things listed above true at the same time!
A choice-of-law clause selecting the law of the former home state can still be enforceable if that state had a substantial relationship to the parties or the agreement at the time it was made (for example, the company was formed there, members or managers resided there, or the agreement was negotiated and signed there). The mere fact of later conversion to Texas does not automatically render the clause unenforceable.
However, once the company is operating primarily in Texas, has Texas members or managers, or is entering new contracts in Texas, a court could find that Texas has a materially greater interest in certain internal-affairs or governance issues. In those circumstances, the clause is more vulnerable, particularly on matters involving fiduciary duties, member expulsion, dissolution, or indemnification.
Key Takeaway
A pre-existing choice-of-law clause does not automatically disappear when an entity converts to a Texas LLC. Texas courts will generally honor a reasonable choice-of-law provision. At the same time, the longer the company operates as a Texas entity with Texas contacts, the stronger the argument becomes that certain internal matters should be governed by Texas law. The safest practical step is a deliberate post-conversion review and, in most cases, a restated operating agreement.
Practical Post-Conversion Review Checklist
Because the outcome is fact-specific, companies that have converted (or are considering conversion) should review the operating agreement with the following points in mind:
- Confirm the basis for the original choice. Document why the foreign state’s law was selected when the agreement was signed.
- Identify which provisions are most sensitive. Governance, fiduciary duties, member expulsion, dissolution, and indemnification are the areas where a conflict with Texas policy is more likely to matter.
- Decide whether to restate the agreement. Many companies elect to restate the operating agreement under Texas law after conversion, even if the old choice-of-law clause remains technically enforceable. This eliminates future arguments.
- Address related clauses together. Choice of law, forum selection, and arbitration provisions should be reviewed as a package. Changing only the choice-of-law clause can create inconsistencies.
- Update downstream documents. Employment agreements, member buy-sell agreements, and major commercial contracts that incorporate the operating agreement by reference should be checked for consistency.
Frequently Asked Questions
Does converting my out-of-state LLC to a Texas LLC automatically cancel my old choice-of-law clause?
No. Under TBOC § 10.106, the governing documents of the converting entity continue in effect after the conversion. A choice-of-law clause does not disappear simply because the company is now a Texas entity.
Will Texas courts enforce a choice-of-law clause that selects another state’s law after conversion?
Usually, yes—if the chosen state had a substantial relationship to the parties or the agreement when it was signed and applying that law does not violate a fundamental Texas policy. Texas follows the Restatement (Second) of Conflict of Laws § 187 approach. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990).
When does a pre-existing choice-of-law clause become vulnerable after conversion?
The risk increases the longer the company operates primarily in Texas, has Texas members or managers, or enters new contracts in Texas. Issues involving fiduciary duties, member expulsion, dissolution, or indemnification are more likely to be challenged than pure commercial terms.
Should we restate the operating agreement after conversion?
In most cases, yes. Restating the operating agreement under Texas law eliminates future arguments about which state’s law controls internal affairs and removes inconsistencies between the old choice-of-law clause and the company’s current operations.s.
Does the choice-of-law clause affect contracts other than the operating agreement?
It can. Employment agreements, buy-sell agreements, and commercial contracts that incorporate the operating agreement by reference should be reviewed. A surviving choice-of-law clause in the operating agreement does not automatically control every other document, but it can create confusion if the documents point in different directions.
What should we review first after conversion?
Start with the choice-of-law, forum-selection, and arbitration provisions together. Then examine sensitive governance sections (fiduciary duties, expulsion, dissolution, indemnification) and any downstream agreements that reference the operating agreement.
Is there a risk of conflict with Texas law even if the clause remains enforceable?
Yes. Texas courts will generally honor a reasonable choice-of-law clause, but they will not apply foreign law if it violates a fundamental Texas policy on a matter in which Texas has a materially greater interest. That is why many companies elect to restate rather than rely on the old clause indefinitely.
Need Help Reviewing a Choice-of-Law Clause After Entity Conversion?
Wilson Whitaker Rynell regularly advises businesses on entity conversions, operating agreement restatements, and the enforceability of pre-existing choice-of-law provisions under the Texas Business Organizations Code. If you have converted (or are considering converting) an out-of-state entity to a Texas LLC and want to confirm whether your current governing documents remain enforceable, contact us to schedule a consultation.
Wilson Whitaker Rynell – Experienced Texas Business & Corporate Attorneys
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