By the Interested Director Provision in the Texas Business Organizations Code
By LaCrecia Perkins and Ladd Hirsch

“The only way to get rid of temptation is to yield to it.” -Oscar Wilde

“I generally avoid temptation unless I can’t resist it.”  -Mae West

“That which is hateful to you, do not do unto your neighbor.”  -Hillel the Elder

Temptation is powerful.  We all know this well, which is why these quotes by author and bon vivant Oscar Wilde, and actress and legendary sex symbol Mae West evoke nods of agreement.  But giving into temptation can result in significant harm to ourselves and others.  That is why more than 2000 years ago, the revered Jewish religious leader and biblical sage, Rabbi Hillel, implored his followers to treat others as they would want to be treated.

In the modern business world, temptation wins out when managers and majority members of Texas limited liability companies (“LLCs”) exploit their controlling power for their own benefit to the detriment of the company’s minority investors.  These self-serving actions by governing persons may result in breach of fiduciary duty claims being filed against them, causing these governing managers or members to turn to the Texas Business Organizations Code (“TBOC” or the “Code”) in search of a legal defense.  The TBOC does not provide governing persons with a “get out of jail free card,” but the Code does contain an “Interested Director” provision that may be helpful to LLC majority owners and managers who have to defend against breach of fiduciary duty claims.  See TBOC § 101.255.  This post evaluates the scope and the limits of the TBOC’s Interested Director provision.
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Hospitality – the friendly and generous reception and entertainment of guests, visitors, or strangers in which the host receives the guests with goodwill.

It is a common complaint that companies now provide a disappointing level of customer service.  But merely providing good service is not enough for a business to be assured of success. In a superb article on the Skift[1] hospitality website, 6 Basic Lessons in Hospitality From Danny Meyer, Deanna Ting summarizes a discussion held with Mr. Meyer at New York University in which he encourages businesses to go beyond service to providing customers with remarkable hospitality.  Mr. Meyer is a renowned restauranteur and the force behind acclaimed New York based restaurants such as Shake Shack, The Modern, Gramercy Tavern, and Union Square Café.

Ms. Ting’s article reviews six lessons from Mr. Meyer on hospitality, which have broad importance for entrepreneurs.  This post considers lessons for business owners from all types of industries from the discussion with Mr. Meyer at NYU and from his New York Times best-selling book, Setting the Table: The Transforming Power of Hospitality in Business.  Mr. Meyer explains it this way:
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By Abby Kotun and Ladd Hirsch

For many company founders, the business they created is far more than an investment and is closer to a baby they have nurtured and supported.  As the company achieves a significant level of success, however, the founders may not be quite as involved in day-to-day operations of the business.  In this later phase, the owners may have retained an experienced CEO along with other senior officers who are striving to maximize the company’s bottom line while the owners focus on strategic alternatives and other opportunities outside the business.

It is at this point, when things appear to be running smoothly and company is on a profitable glide path, that the owners are stunned to learn that the rock star CEO they retained or one of the members of the CEO’s hand-picked management team is accused of sexual misconduct.  This situation is becoming more common as the EEOC reported a 12% increase in the number of sexual harassment charges filed in fiscal year 2018.  EEOC Preliminary FY 2018 Sexual Harassment Data (Oct. 4, 2018), https://www.eeoc.gov/eeoc/newsroom/release/10-4-18.cfm.  What are the next steps that company owners should take when these allegations are made?  The answer is of critical importance to the business, because the company’s stakeholders are watching how this is handled, including other employees, managers and customers.  This post presents some important Dos and Don’ts for company owners to consider when faced with their #MeToo Moment.[1]
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By LaCrecia Perkins and Ladd Hirsch

A look back at Business Divorce developments during Texas 2018 reflects a continuing negative trend for private company shareholders[1] who have claims for misconduct against the company’s control group (e.g., majority owners, officers, managers, and/or directors).  The rocky road for Texas shareholders began in 2014 with the Supreme Court’s Ritchie v. Rupe decision,[2] which eliminated the remedy previously available to minority shareholders of securing a court-ordered buyout of their ownership interest upon proof that majority owners had engaged in oppressive conduct.  The slope became even steeper in late 2018 with an appellate court decision requiring dismissal of shareholder derivative lawsuits if the shareholder cannot meet the “Continuous Ownership Rule.”  See In re LoneStar Logo & Signs, LLC.[3]

What are shareholder derivative lawsuits, how does the Continuous Ownership Rule apply to claims in these cases, and do private company shareholders continue to have the right to pursue valid claims for wrongdoing against the company’s majority owners, officers, managers, and directors?  This post answers those questions, and the upshot is that the best advice for shareholders is to file their derivative lawsuit as soon as possible.  While winning the race to the courthouse provides no guaranty that the lawsuit will be permitted to continue through trial, under the current Texas law, having a derivative lawsuit on file gives the shareholder the best possible legal and equitable arguments for maintaining the lawsuit to judgment.
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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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When a private equity (PE) firm buys the controlling interest in a private business, the purchase often includes an earn-out provision which calls for the owner to remain active in the business for some period of time. The use of an earn-out provision can seem like a win-win for both parties, because it allows the PE firm to buy the company for a lower purchase price and provides the business owner with the opportunity to secure a substantial additional payment if the company achieves certain agreed financial performance targets after the sale.  The problem with this rosy picture is that earn-out provisions are a common cause of disputes and litigation over whether the earn-out requirements were met after the purchase and whether the owner is entitled to the additional payment.

This post focuses on conflicts that frequently arise between PE firms and owners over earn-out provisions and suggests changes for both PE Firms and owners to consider, which may reduce or eliminate these post-purchase conflicts.  
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In the private company world, the buck stops with the majority owners, who generally hold the reins to running the business.  In our experience, however, it is not uncommon for some majority owners to push the limits of their control by engaging in self-dealing transactions that are for their own benefit.  The self-interested transactions in which majority owners may engage can take many different forms, including paying excessive bonuses to themselves, directing the company to enter into “sweetheart” deals with their other companies, taking company opportunities for their own gain, and using company assets or personnel free of charge.

When minority investors seek legal recourse from abuse of authority by its majority owners, the controlling owners will often point to a little-known Texas statute, which they contend renders them immune from liability for their actions.  See Texas Business Organizations Code § 101.255.  As we say in Texas, that dog won’t hunt.  This post explains why the existence of Section 101.255 does not provide majority owners with a “get out of jail free” card, and why this statute does not validate their improper conduct when they engaged in self-dealing.
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By Sam Vinson and Ladd Hirsch

In his famous “To Be or Not to Be” soliloquy, Hamlet anguished over whether his future was worth living. [1] Hopefully, private company founders picture a future less bleak than Hamlet’s grim outlook. When the founders of fast-growing private companies accept new investment capital, however, they need to consider the future of the resulting ownership structure of the business, particularly when the financing involves issuing new company shares.

When a private equity investment is made in a private company, a balance must be struck between the competing interests of the company’s founders, on one hand, and the private equity or venture capital firm (the “PE investor”) on the other. From the PE investor’s perspective, an investment in a private company makes sense only if the founders maintain their continued commitment to the company’s success. Once the investment is made, founders will want to make sure they have an exit plan in place that provides them with ample rewards when they depart based on the financial success (hopefully) they helped the company to achieve.

This balancing of interests between founders and PE investors is often handled through a vesting process regarding the founders’ stock or equity ownership. This post, therefore, focuses on the use of vesting schedules by private companies when issuing stock. Ideally, the use of vesting schedules that apply to stock ownership is complimented by buy/sell exit planning, i.e., founders will want to secure some type of a buy/sell agreement that permits them to monetize their interest in the company at the time of their exit.
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By Jeff Balcombe [1]We are pleased to present this guest post from Jeff Balcombe, a highly regarded business valuation expert based in Dallas, who is a founding principal with his firm BVA Group.

In a perfect world, business partners who reach the point of parting ways would have a clear, unambiguous plan in place governing their separation.  Unfortunately, when they engage in business in the real world, many company owners who need a Business Divorce find that they never adopted any type of separation agreement or that the agreement they have is missing key elements necessary to facilitate a prompt, inexpensive separation.  This post therefore outlines a Business Divorce process designed to achieve a prompt, efficient exit plan for business partners.

The Exit Plan Should be Approved When the Investment is Made

For an exit plan to work effectively, it must be adopted in advance, because a successful Business Divorce involves far more than determining a buyout price based on an appraisal that supports the buyer’s or seller’s notion of value.  In fact, a “ready-fire-aim” approach that calls for getting an appraisal, and then starting buyout negotiations is almost certain to result in a drawn-out, expensive process that may end with the parties in dispute.  To minimize costs and reach an agreed outcome, both parties must adopt a process with a definite end-point—a successful separation.
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“The bad things you can see with one eye closed. But keep both eyes wide open for the little things. Little things mark the great dividing line between success and failure.”
Jacob Braude, Author and Humorist (1896-1970)

By Sean Brown[1] and Ladd Hirsch

In business, an eyes wide open approach is essential to the successful purchase of a private company. When the purchaser of a private company enters into a letter of intent (“LOI”) or reaches a handshake deal to buy a private business, the little things often have not yet been fully disclosed and it therefore remains to be seen whether the transaction will fail or succeed. This post reviews focuses on little things that a private company buyer should make sure to address to achieve an optimal outcome, including steps to be taken after the parties have signed the LOI.

Recognized by Texas Bar Today’s Top 10 Blog Posts

Little Thing No. 1: Conduct Adequate Due Diligence

Due diligence, in the context of mergers and acquisitions, is commonly referred to as the process by which the buyer gathers information about the business or the assets for sale. It is crucial for a buyer to conduct sufficient due diligence to establish the following information, a minimum, before closing on the purchase:

Confirm the seller has the authority to sell the stock or assets of the target company;

  • Identify and investigate potential liabilities or risks;
  • Identify necessary steps to integrate the target business into existing business; and
  • Identify any obstacles to closing the transaction, such as shareholder consents, third-party consents, or prohibitions on transfer.

Establishing this information requires the buyer to review the seller’s organizational documents, such as formation documents, bylaws or operating agreements, benefit plans, vendor contracts, supply contracts, and customer contracts. Some of the common issues the buyer will need to focus on are: (i) ownership of the target company, (ii) existing management of the company, and (iii) necessary consents from third-parties in connection with key contracts.
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