In February 2009, Pittsburgh Steelers wide receiver Santonio Holmes made a toe tapping catch in the back corner of the end zone[1] to secure a thrilling, come-from-behind win and crush the hearts of Arizona Cardinals fans in Super Bowl 43. For private company owners running their own firms, the boundaries for their conduct are
According to the financial press, private equity investors are holding huge sums waiting for the right private company in which to invest. In late March, CNBC reported that private equity firms have a staggering $1.5 trillion in cash on hand (more than double the amount from five years ago) and that they are actively seeking deals in the travel, entertainment and energy industries. In April, Vanity Fair stated that in each of the past four years, private equity managers have raised more then $500 billion for investment, and noted that from 2013 to 2018, more private equity deals took place than in any five year time frame in American history.
Private equity firms are not the only ones who are making investments in private companies. Angel investors and others are stepping up to fund privately held businesses, and there are many documented success stories of individual investors who have struck platinum with their private company investments. It is is also true, however, that a sizable number of fast growing private companies hit the rocks and burned through all or most of the funds that were invested in them.
The purpose of this blog post is not to help pick private company winners—that is a topic for others with the ability to discern which companies have the best ideas, management teams and the staying power to succeed on a long-term basis. But picking a successful private company is only part of the story. A private company’s success will not automatically make an investment in the business a success if the company’s governance documents do not provide the investor with a measure of protection on several important fronts. This blog post therefore focuses on the critical terms that an investor will want to secure in the company’s governance documents before actually making a substantial investment in the company.
Continue Reading Looking Past the Face of the Shiny Penny: Check the Fine Print of All Private Company Investments
There are many reasons for business owners to consider adding new partners, including to secure additional capital, to add needed expertise to help grow the company, to bring family members or close friends to join in building the business and to put a succession plan in place. Adding new partners can therefore provide a boost to the company’s revenues, lighten the load carried by the founder, and put the business on course for long-term success. But this decision is not without risk because the new business partners may create conflicts, disrupt the business and insist on making changes that put the company’s existence in peril.
If after carefully weighing the pros and cons, business owners decide to move forward in adding new partners, this post reviews important steps they can take to protect themselves and the business from the decisions and actions of these new stakeholders in the company.
Equity Ownership Can Be Conditional or Subject to Cancellation
One protective step business owners can take when adding a new partner is to make the addition of a new partner’s ownership conditional or subject to cancellation. This approach permits the owner to wait to grant the ownership interest in the company to the new partner until he or she has met specified business goals by a certain date or to cancel the grant of equity to the new partner if the specific goals have not been achieved by the agreed date.
Continue Reading Keeping Eyes Wide Open When New Members Join the Pack: A Cautious Approach to the Addition of New Business Partners
Lawyers play a critical role in negotiating and drafting contracts, but when business owners and investors enter into significant agreements regarding or on behalf of their private company, these documents are too important to leave them solely in the lawyer’s hands. The parties to these business agreements need to carefully read and understand their terms if they want to avoid unwelcome surprises when their agreements become the focus in a future legal dispute. There are a number of issues to consider in documenting business agreements, and the elements that go into developing binding business contracts is the subject of this blog post.
The Terms of the Written Agreement Control
The starting point in securing an enforceable agreement is to “get it in writing.” Virtually all business agreements are entered into after the parties have discussed the material terms of the contract, and in some cases, these negotiations may last for weeks or even months. One party to the contract may therefore conclude that assurances it received from the other party during these negotiations should be as binding as the actual terms of the agreement. Unfortunately, a party who seeks to enforce oral promises or assurances outside the contract faces a steep uphill climb under Texas law.
Standard contract terms will likely include both a “merger/integration clause” and “anti-reliance provisions.” These terms exclude from being part of the agreement any offers that were made during the parties’ discussions, as well as any representations the parties made that are not expressly set forth in the contract. Over the past two years, Texas Supreme Court has made clear that the actual terms of the contract control, and it has repeatedly rejected claims that are based on statements made outside the contract. In 2018, in Orca, the Supreme Court denied a fraud claim without requiring a trial on the basis that the reliance element of fraud can be “be negated as a matter of law when circumstances exist under which reliance cannot be justified.”[1] Just last year, the Court overturned large jury verdicts in two separate fraud cases setting aside judgments based on alleged misrepresentations that were not set forth in the contracts at issue.
Continue Reading Did Your Business Deal Just Do a Disappearing Act? Securing Legally Binding, Enforceable Contract Terms
“Adversity does not build character, it reveals it.”
James Lane Allen, Novelist, 1849-1925
The sudden onset of the Coronavirus has required private company business partners to confront unprecedented challenges. In some cases, the partners’ actions in dealing with the Pandemic have led to conflicts revealing incompatible views between them in how to operate the business in a time of crisis. As a result, the partners may want to engage in a Business Divorce after the virus subsides, but separating one or more business partners from the company is not likely to be simple or smooth if they have not already put a buy-sell agreement in place. Fortunately, the absence of a current buy-sell agreement is not an insurmountable hurdle if the partners will take the time to negotiate and adopt a mutually beneficial partner exit plan. Reaching agreement on a buy-sell agreement is a critical step for business partners to avoid a prolonged and expensive conflict that will be both disruptive to the company and also potentially destructive to their personal relationship.
This post discusses the key factors that both majority owners and minority investors will want to consider in negotiating a mutually acceptable buy-sell agreement that allows for partners to depart the business on amicable terms in the future.
The Trigger Point
The first question business partners will need to address is when the buy-sell agreement can be triggered. To be fair to both sides, the parties will both want the right to trigger a buyout or redemption. From the majority owner’s perspective, he or she may not want to be required to remain in business with the minority investor. The majority owner will therefore want to secure a “redemption right” to repurchase the investor’s ownership interest at some point. By the same token, the minority investor will not want to be stuck holding an illiquid, unmarketable interest in the company with no exit right. The minority investor will therefore want to ensure to obtain a “put right” that enables the investor to secure a buyout from the majority owner and the right to monetize the investor’s ownership interest in the company.
Continue Reading Time for A Buy/Sell Agreement? Private Company Owners May Need to Put a Partner Exit Plan in Place
In the midst of a global Pandemic that is devastating to the health of our community and to our economy, the last thing on the minds of private business owners may be the future sale of their company. But while business owners are sheltering safely at home as ordered, they may be wise to consider adopting a longer term view, and evaluating specific steps that would help to position the company for a future, profitable sale.
This post reviews potential hidden value in the business that the majority owner can bring to table to enhance its sale value, but which may not be reflected on its financial statements. This discussion does not present an exhaustive list, and instead, the purpose is to prompt a review of the company’s existing or potential business assets that may require further development after the Pandemic subsides and business activities are permitted to resume.
Continue Reading Unlocking Hidden Business Value: Securing Top Dollar by Giving Full Appreciation to All Available Assets On The Sale of a Private Company
Jerry Colonna, author of “Reboot: Leadership and the Art of Growing Up”
We have written about the Imposter Syndrome before, but it may have become an even more prevalent concern for business professionals. Just last week, Entrepreneur magazine published a series of interviews with business leaders who have dealt with this challenge in an article titled: “10 Successful Leaders Share Their Struggles with Imposter Syndrome and How to Overcome It” (view the article). Moreover, the Imposter Syndrome is not confined to leaders at the top of the corporate chart as more than half of the employees at Amazon, Facebook, Microsoft, and Google who responded to a survey in 2018 reported that they sometimes feel they don’t deserve their job despite their accomplishments. ¹
Finally, research from the International Journal of Behavioral Science indicates that 70% of people experience imposter syndrome at one point in their lives (view the article). It is time to look again at the Imposter Syndrome, and to consider ways this problem can be dealt with effectively by businesspeople when they experience feelings of inadequacy.Continue Reading The Imposter Syndrome is Real, But It Can be Overcome
Logic is the beginning of wisdom, not the end.
— Dr. Spock, Star Trek, Starfleet Officer
The long-running legal saga between Enterprise Products Partners (“Enterprise”) and Energy Transfer Partners (“ETP”) may finally be nearing its end after the Texas Supreme Court issued a unanimous decision last Friday, January 31, 2020, holding that no partnership ever arose between the parties. (Read more) This dispute between two of the major players in the energy industry focused on the legal standard for determining when a partnership is formed. ETP argued that the test for partnership formation should be based on the parties’ conduct, while Enterprise maintained that specific conditions the parties agreed to include in their contracts had to be established before a partnership was created, and it contended that those conditions had never been met.
The Supreme Court’s opinion may be the final chapter in eight years of hard-fought litigation between Enterprise and ETP, although ETP will have the right to file a petition for rehearing of the Court’s decision. We will share our third blog post about the case and also review some important lessons for business owners gleaned from this lengthy legal conflict. ¹
Continue Reading Business Owners Take Note as Enterprise Completes Its Mission: Supreme Court Holds No Common Law Partnership Was Formed with ETP
William Covey, 7 Habits of Highly Effective People
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William James, American Psychologist and Philosopher
The new year has started and private company owners are ramping up business plans for 2020. Their focus is on specific key targets—adding customers, building new lines of business, developing more efficient ways to produce their products or deliver their services and cutting costs without hurting quality. These business plans are driven by financial concerns with the ultimate goal of making the business more profitable in the year ahead.
While profitability is a critical measure of business success, as we launch into this new year, we want to challenge our audience of private company entrepreneurs, investors, officers, directors, managers, and advisors to rethink their approach to achieving profits. Consider the potential outcome from elevating the appreciation felt by all company stakeholders, which goes beyond elevating the company’s balance sheet. The important role of appreciation in business is described in a blog post titled, The Value of Gratitude as a Business Strategy:
How Should Appreciation Be Defined
As a starting point, appreciation in the business context is defined as the increase in the value of assets over time. Appreciation can also be viewed, however, as critical component of a powerful company culture. In the workplace, appreciation is a powerful motivator:
Focusing on the role of appreciation in business is not a concept that should struggle to find a place in modern company culture. In her article in Forbes in 2018, Kelly Siegel points to research showing that “focusing on gratitude is said to lower blood pressure, improve your sleep, reduce depressions and anxiety and help prevent substance abuse.” Turning to the business world, she stated:
What would a “culture of gratitude” look like in practice, and how would it be created and maintained? A number of companies and commentators are showing the way. Let’s take a look at some of the important lessons that have been learned to date about how appreciation can be such a positive and powerful force in a company’s culture.
Continue Reading Business Appreciation: Adding Gratitude to Company Culture in 2020
Our first blog post of the New Year looks back at an important case the Texas Supreme Court decided in 2019, and its potential impact on majority owners seeking to avoid fraud claims by new investors. See Int’l Bus. Machines Corp. v. Lufkin Indus., LLC, 573 S.W.3d 224 (Tex. 2019), reh’g denied (May 31, 2019). The case is notable because the Supreme Court reversed the trial court’s judgment following a jury trial that resulted in a fraud judgment against IBM in the amount of $21 million before IBM’s appeal.
The Supreme Court overturned the judgment, because in the parties’ contract, Lufkin Industries (the buyer of computer management software) had expressly disclaimed that it was relying on any misrepresentations that IBM (the software seller) had made about its software’s expected performance before the parties signed their agreement. Stated simply, the Court held in Lufkin that a buyer cannot pursue a claim for being defrauded into signing a contract if the buyer agrees to expressly disclaim in the contract that it was relying on any of the statements at issue.
The Court’s language was clear in setting forth the legal standard at issue that applies in regard to claims for fraudulent inducement.
Supreme Court’s Lufkin Holding
”Under Texas law, a party may be liable in tort for fraudulently inducing another party to enter into a contract. But the party may avoid liability if the other party contractually disclaimed any reliance on the first party’s fraudulent misrepresensations. Whether a party is liable in any particular case depends on the contract’s language and the totality of the surrounding circumstances. In this case involving a contract to purchase a business-management software system, we hold that contractual disclaimers bar the buyer (Lufkin Industries) from recovering in tort for misrepresentations the seller (IBM) made both to induce the buyer to enter into the contract and to induce the buyer to later agree to amend the contract.”
This post will focus on the guidance that the Supreme Court has provided in the recent Lufkin case for majority owners who are considering bringing new investors into the business.
Elements of Disclaimer – Factors the Court Considers
The Court in Lufkin made clear that it was not eliminating all claims for fraud based on the standard merger and integration clauses that are set forth in contracts, but it held that “a clause that clearly and unequivocally expresses the parties’ intent to disclaim reliance on the specific misrepresentations at issue can preclude a fraudulent inducement claim.” The Court cited with approval on this point, its previous decision issued ten years earlier in Forest Oil. See Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 60-61 (Tex. 2008)(emphasis added).
According to the Court, not every disclaimer is effective, and courts “must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding. See Forest Oil, 268 S.W.3d at 60. The Court stated that in deciding if a particular disclaimer provision will be upheld and require dismissal of a fraud claim, trial courts should consider whether:
Continue Reading Eliminate Investor Fraud Claims in 2020: Recent Texas Supreme Court Decision Shows the Way