Texas Business Dispute Blog

Monday, March 28, 2016

When Sweeteners Turn Sour: Recent Texas Supreme Court Case Highlights Problems With Earn-Out Provisions in Private Company Purchase Contracts

Earn-out provisions in purchase contracts are “sweeteners” than can add significant value to the purchase price in the sale of private companies and these terms are increasingly being used in purchase contracts.  This Post explains why the use of earn-out provisions is on the rise in purchase contracts, but it also signals a warning.  As a Texas Supreme Court decision last year made clear, if earn-out provisions included in purchase contracts do not address all key issues and are not drafted with care, their use may result in serious legal problems.


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Friday, March 18, 2016

Putting on the Ritz on the Company Dime: The Problem of Excessive Executive Spending

“Power corrupts, but absolute power corrupts absolutely.”  This well-known quote from Lord John Acton in the late 1800’s is perhaps most often applied to dictators who managed to secure unbridled political control in their country.  The corrupting influence of power, however, can also be seen in private companies.  Some highly successful executives in private companies succumb to the “diva effect.”  This takes place when top executives believe their lavish personal expenses and lifestyle should all be borne by the company. 

We have listed below a variety of executive expenses – can you guess which one was not actually charged by a business executive?  The answer follows the end of this Post after we review a number of steps than can be taken to prevent an outbreak of the diva effect.


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Monday, February 29, 2016

Successful Private Company Investing: Paying Attention to Danger Signs

Buy low and sell high.  Sounds simple – and attractive.  The buy low/sell high mantra is particularly enticing when applied to purchasing a minority stake in a private company, which has enormous growth prospects and the promise of huge potential returns.  The pursuit of these high returns, however, comes with steep risk factors as these are often high risk – high reward investments.  In the absence of crystal ball to guide investment decisions, investors need to be wary and conduct extensive due diligence. This Post addresses some of the red flags that may arise in the due diligence process and signal that the proposed investment is one to avoid.


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Monday, February 22, 2016

Making Your Business Prosper, Not Just Survive: Hiring All-Stars and Avoiding Bad Apples on Your Team

Hiring the wrong people can quickly push a company off course, especially a growing private company.  This seems obvious, yet statistics show that companies do a remarkably poor job of hiring.  Gallup reports that, companies hire employees 82% of the time who have the wrong qualifications or who are not a good fit for the business. This report is even more troubling in light of research by the Harvard Business School, which determined that it costs an average of $12,489 to replace a poorly performing employee, and that figure does not include the legal risks that are involved in terminating employees.

For business owners, the questions this data raises are: (1) why are companies doing such a poor job of hiring, and (2) how can they fix the problem and consistently hire great employees?


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Wednesday, February 3, 2016

Risks Posed By “Do It Yourself” Legal Contracts: Just Don’t Do It

Private company business owners often feel pressured to hold the line on costs, and the pressure only increases as market conditions become more challenging.  At the same time, the billing rates for lawyers continue to escalate, sample forms of contracts can be found on the web for free, colleagues have contracts they are willing to share and the business issues addressed in many contracts seem fairly straightforward.  Business owners may therefore conclude that they can forego obtaining help from outside legal counsel in drafting and negotiating contracts as an effective means to achieve substantial cost savings. 

While business owners do face significant market pressure, an approach that leaves the lawyer on the sidelines in contract negotiations often turns out badly.  The short-term savings the company obtains from foregoing legal advice may ultimately result in costs that are many times greater than the amount the company saved.  These future costs can skyrocket when key terms are missing in the contract or when poorly drafted contract terms leave the company without certain legal rights or leads to protracted, expensive litigation.  This Post focuses on four areas in which business owners should be particularly reluctant to go it alone in negotiating contracts.


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Monday, January 25, 2016

Too Much Money: Can a Minority Shareholder Succeed on a Breach of Fiduciary Duty Claim Based on The Company’s Excessive Retained Earnings

TOO MUCH FUN


By Daryle Singletary


Too much fun, what’s that mean? 
It’s like too much money, there’s no such thing
It’s like a girl too pretty with too much class
Being too lucky, a car too fast
No matter what they say, I’ve done
But I ain’t never had too much fun


The lyrics of country songs share the heart of personal stories in a way like no other music genre.  In the chorus above from his song “Too Much Fun,” Daryle Singletary croons that there is no such thing as too much money.  His chorus got me to thinking whether the concept of too much money has any role to play in the operation of private companies.  Specifically, would a Texas court ever hold that the officers and directors of a private company had breached their fiduciary duty by retaining excessive earnings?  Or, have Texas judges taken Daryle’s words too much to heart and concluded that there is no such thing as too much money when it comes to the amount of profits that a company can retain and choose not distribute to its owners?


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Tuesday, January 19, 2016

The Danger From Within: Texas Appellate Court Sets Higher Bar For Companies to Succeed on Claims Made Against Disloyal Directors

It is no longer news to report that Texas has become a hostile forum for corporate (and other) plaintiffs who recover large jury awards.  For more than a decade, the press has featured numerous stories on Texas appellate courts (including the Supreme Court) overturning large jury verdicts after jury trials.  One of the most recent, notable examples is a decision by the appellate court in San Antonio, which disregarded detailed jury findings in reversing a verdict awarding substantial damages to a corporate plaintiff harmed by two of its disloyal, outside directors.  See Huff Energy Fund, LP, et. Al. v. Longview Energy Company, No. 04-12-003630-CV (Tex. App. – San Antonio, November 25, 2015).


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Monday, January 11, 2016

The New Normal: Shareholder Derivative Lawsuits in Texas - Key Issues in Filing and Prosecuting Derivative Claims

As 2016 begins, the anecdotal evidence indicates that derivative lawsuits filed by private company shareholders in Texas are increasing.  This rising tide of shareholder derivative litigation was easy to foresee after the Texas Supreme Court’s Ritchie v. Rupe decision in June 2014 rejecting court-ordered buyouts for shareholder oppression and leaving only receivership as a remedy for oppressive conduct by majority owners.  Minority owners, however, are still permitted to pursue shareholder derivative lawsuits filed in the name of the company to recover for injuries sustained by the business.


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Tuesday, December 29, 2015

Royalty Dispute Over Steamy Sex Books and Lust For Oil Pipeline Battle: Shades of Gray On Display in Recent Texas Partnership Litigation

Has it become riskier for private company business owners in Texas to conduct business when they enter into preliminary agreements with third parties?  Two high profile Texas jury verdicts in the past two years have made this a more frequent question.  In both cases (1) a Fort Worth lawsuit tried earlier this year seeking royalties resulting from the “Shades of Gray”book series and (2) an oil pipeline dispute tried in Dallas in 2014, the juries found that common law partnerships existed between the parties even though they had never signed written partnership agreements.  Despite the angst these decisions created (largely from outside Texas), on closer examination of the verdicts, both now on appeal, Texas business owners can take precautionary measures to avoid successful claims based on an unwritten “partnerships by conduct.”


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Monday, December 14, 2015

Get It In Writing - The Power of Words: No-Reliance Provisions May Bar Investors' Fraud Claims

The age-old expression “get it in writing” reflects the wisdom that it is risky to rely on a handshake as the only evidence of a deal.  Getting it in writing is also important when private company owners document transfers to investors.  This is particularly true if majority owners want to prevent later fraud claims by investors based on statements allegedly made to them before they purchased their interest in the business.  In this context, majority owners should consider including “no-reliance” provisions in contracts with investors, because courts are increasingly willing to hold that these contract terms will preclude future investor fraud claims. 


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Monday, November 30, 2015

LISTEN TO MOM, AND KEEP ALL OF YOUR EMAILS NICE: EARLY LESSONS FROM ANDREWS KURTH ADVERSE JURY VERDICT

A Texas jury just issued a large verdict in a case against the Houston-based law firm of Andrews Kurth LLP in a case that involved a business dispute between two brothers.  While it is too soon to reach any final conclusions, the magnitude of the jury’s award—more than $167 million—provides us with an opportunity to consider some important lessons for both lawyers and family business owners.  Chief among those are to remember the sage advice we received from our mothers: if you don’t have anything nice to say, don’t say it at all (even in an internal email to co-counsel).


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With offices in Houston and Dallas, Diamond McCarthy LLP assists a variety of clients with their Texas Business Divorce matters throughout Texas, including Austin, San Antonio, Midland, Fort Worth, Galveston, Amarillo, Abilene, and Waco.



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