Texas Business Dispute Blog

Life is all a about second chances.   In the business world, minority investors may feel that they are trapped if they failed to obtain a buy-sell agreement before investing and have no contractual right to exit the company.  This situation is common in family businesses when the minority owners did not request their grandparents, parents or other family members to provide a buy-out right at the time the company was formed.  Fortunately, all hope is not lost for minority investors who did not obtain a buy-sell agreement before they obtained their stake in the company.  This post explores ways minority investors may secure a buy-sell agreement with majority owners even after the investors acquired their minority ownership interest in the business.

The season finale of the hit reality TV show The Bachelor attracted more than 8 million viewers. My wife and teenage daughters help make up this devoted fan base, and watch every episode. Yet, when I question them about whether the subject of a pre-nup agreement has ever come up on the show, I get eye rolls, and comments like, “Dad, don’t be such a downer.”  Assuming that the Bachelor and his new fiancé do make it to the altar, however, the show also does not mention that

The legal tension is building.  Private Texas companies and their owners are awaiting a court decision that may force them to say “Howdy, Partner” to companies with whom they have no written partnership agreement. The case on which business eyes are focused is ETP v. Enterprise Products Partners, which is before the Dallas Court of Appeals after a jury awarded $535 million in early 2014.  The case has been described as a corporate form of common law marriage to a company that the jury determined was jilted in favor of another. This is the hottest partnership case the Lone Star State has seen in years.

The Disputed Partnership at the Heart of the Case

Energy Transfer Partners LP (“ETP”) alleges that it formed a statutory (unwritten) partnership with Enterprise Products Partners LP (“Enterprise”) to build a crude oil pipeline that would carry oil from Cushing, Oklahoma to the Gulf of Mexico. Enterprise contended that no partnership arose because the boards of the companies never signed a definitive agreement. ETP countered that the actions of the companies confirmed their intent to work as partners and that their conduct met the five-factor test for determining partnership in the Texas Business Organizations Code.

The ink is barely dry on the half billion dollar verdict that a Dallas federal court jury returned last week for ZeniMax Media against Oculus, a virtual reality company that Facebook acquired in May 2014. Even before the federal court issues a final judgment and Oculus files an inevitable appeal, however, the case provides valuable lessons for business owners and investors.

Tis the season to say, out with the old and in with the new.  But for minority shareholders with ownership in private Texas companies during 2016, not much changed.  Minority shareholders remained without access to a buyout remedy under Texas law, which resulted in minority owners pursuing traditional claims against majority owners, as well as seeking relief under more novel causes of action. 

This is the second in a two part series on significant legal issues that affected private company business owners during 2016.  We consider in this post how the absence of a claim for minority shareholders that would permit them to secure a buyout remedy has resulted in a spike in claims filed against majority owners for breaching the fiduciary duties they owe to their companies, and also caused minority owners to consider other legal remedies to pursue against majority owners.

A sure sign the year is winding up is the release of A sure sign the year is winding up is the release of TIME magazine’s “Person of the Year” list.  If TIME created a similar list of legal developments impacting owners and investors in private Texas companies this past year, at least two issues would be on it: the adoption of the Defend Trade Secrets Act and the stalemate that continues to exist for minority shareholders who have claims for oppression against majority owners.  The legal restrictions on the oppression claim have spurred an increase in shareholder derivative lawsuits containing allegations that private company officers and directors breached their fiduciary duties to the business.

Picking the devil you know in selecting a business partner may seem like a good strategy.  But the list of celebrities who have suffered financially in their dealings with business partners is striking with losses totaling millions of dollars in some cases.  Uma Thurman lost $1 million. Sting lost $9.8 million. Billy Joel lost $90 million.  And celebrities are not the only ones who have suffered negative results because they, like so many people, picked poor business partners.  Fortunately, there are steps that anyone entering into a long-term relationship with a business partner can take to avoid the financial consequences of a disastrous partnership.

The flight attendants on commercial flights notify passengers where the exits on the plane are located. Fortunately, the vast majority of air travelers never have to put this advice to use.  In private companies, however, business partners head for the exits far more frequently as over the past decade, less than half of startup businesses survived longer than five years, and just one-third lasted for more than ten years.

Most relationships involve conflict at some point, and business partnerships are not immune.  In fact, the intense pressure on businesses makes it more likely that business partners will have disagreements from time to time.  The key question therefore is not whether business partners will ever have conflicts, but whether they can take steps to ensure that the conflicts that inevitably arise between them can be promptly resolved in a way that does no lasting harm to the success of the business.

 This is the first in a two-part series regarding partnership disputes.  This Post focuses on how to resolve partnership conflicts, and steps business partners can take to provide a healthy means for resolving their conflicts.

“If you don’t know where you are going any road will take you there.”  -The Cheshire Cat

As the wily feline wisely suggested to Alice, knowing where you are going is the key to knowing how to get there. At no time is this more true than when a business owner is working on their succession plan.  In our previous posts on succession planning, we stressed the

The successful business owner needs to be able to multi-task, including in the area of succession planning. As noted in the previous post, business owners need to develop and then implement two different succession plans, one for crisis management that applies in the event of an emergency, and a second one that transitions the company’s management and its ownership to new hands. This second post focuses on management succession planning, the final post in this series will review the steps involved in transitioning to new ownership.