Recognized by Texas Bar Today’s Top 10 Blog Posts

By Sean Brown and Ladd Hirsch

The majority owners of private Texas limited liability companies (LLC’s) enjoy a mixed blessing when they also manage their companies.  Majority owners have the power to direct their private companies as they deem fit, but when they disregard the interests of minority owners, they may breach their fiduciary duties to the company.  The members of member-managed LLCs and the managers of manager-managed LLCs owe their companies the fiduciary duties of care, loyalty and obedience under Texas law, which does not permit them to disclaim their fiduciary duty of loyalty.  This post discusses significant legal and business issues faced by managers of Texas LLCs in guiding their companies to success while striving to maintain good relations with their minority owners.

Three significant legal and business challenges that LLC managing owners confront are: (i) the degree of control and extent to which minority owners are permitted to block major company decisions, (ii) whether majority owners have total discretion over profits distributions or whether a minimum requirement exists that requires profits distributions and (iii) the level of financial reporting requirements and related issues of transparency.  In regard to these challenges, majority owners who do not unfairly exploit their control over the business, issue profits distributions when appropriate and engage in open communications are more likely to foster harmonious relations with all company owners through both good times and bad.
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In her thoughtful column in the January edition of the Texas Bar Journal titled, “Do You Suffer From Impostor Syndrome,” lawyer coach Martha McIntire Newman, focuses on a topic that has too long flown under the radar.  Ms. Newman describes this condition as “a state of chronic self-doubt that causes lawyers to fear they will be exposed as incompetent even though the evidence of their success is obvious to their colleagues and clients.”  TBJ, Jan. 2019, p. 56. TopLawyerCoach.com   This anxiety causes even “successful lawyers to second-guess themselves no matter how well they perform.”

The Impostor Syndrome discussed in Ms. Newman’s column is not limited to the legal field.  We have encountered many business owners, executives and entrepreneurs who have struggled, at times, with crippling self-doubt.  Ms. Newman quotes former Starbucks CEO Howard Schultz: “Very few people, whether you’ve been in that [CEO] job before or not, get into the seat and believe today that they are now qualified to be the CEO.  They’re not going to tell you that, but it’s true.”  For business leaders who face doubts resulting from the Impostor Syndrome, this post offers three suggestions to consider in addition to the sage advice provided by Ms. Newman.
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Most private company investors are not tax experts, but developing a working knowledge of the potential for the business to generate phantom income is critical to avoiding unwelcome, tax consequences. What is phantom income exactly, and why does it matter?  This Blog post focuses on answering that question to avoid ghoulish tax surprises appearing after Halloween.
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Since 2014, Energy Transfer Partners LP (“ETP”) has been fighting to hold on to the $535 million judgment it obtained that year against Enterprise Products Partners (“Enterprise”).  Our blog post earlier this year analyzed ETP’s efforts to persuade the Dallas Court of Appeals that ETP and Enterprise, two sophisticated companies in the energy industry, had entered into an unwritten partnership agreement, or as Enterprise referred to it on appeal—a partnership by ambush in disregard of the parties’ written agreements.  
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Based on our personal experience handling Business Divorce matters for both majority owners and substantial minority investors in private companies, we have learned firsthand that there are two sides to every story and every Business Divorce matter is unique.  But, we continue to be surprised by instances of outlandish behavior and self-serving conduct by majority owners that are reported to us by minority partners in the business. 
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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 marriages in the US still have just a 50% chance of lasting despite the continuing decline in the national divorce rate.
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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.
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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.
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Ensuring that Trade Secrets Stay Secret

One of the NFL’s most legendary football coaches, Vince Lombardi, is known for fiery speeches extolling his players that “Winning isn’t everything, it’s the only thing.”  Yet, when triumph on the battlefield is so costly it actually destroys the “winner,” it is known as a “Pyrrhic victory,” named in honor of Greek King Pyrrhus, who lost most of his army in two “successful” battles with the Romans.

This prospect of a Pyrrhic victory—a success that rings hollow—is something that business owners in Texas faced until recently when they filed lawsuits to protect their company’s trade secrets from misuse by former employees and competitors.   The danger was posed because the company was generally required to disclose its trade secrets during discovery in the lawsuit to permit the competitor to mount a defense to the company’s claims.  Thus, in fighting to protect trade secrets from misuse by competitors, the business owner was given the Hobson’s choice of foregoing legal action or filing a lawsuit in which the company would be required to reveal its trade secrets to a business rival.  To a business owner, winning the legal battle to protect the company’s trade secrets could often feel like losing the war. 
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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.
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