In Hotze v. In Mgmt., LLC, family members sued each other over control of a family business. No. 14-18-00995-CV, 2021 Tex. App. LEXIS 5821 (Tex. App.—Houston [14th Dist.] July 22, 2021, no pet. history). Three of the brothers ended up with greatly increased control of the company after debt the company owed to a partnership formed by the three brothers was partially converted into company stock. Id. Two other brothers and other associated parties filed two lawsuits, bringing both individual and derivative claims, which were consolidated for trial. “A key issue in the case was whether the promissory note between Troika and CECO authorized a partial conversion of debt for stock.” Id. The trial court concluded that it did, and instructed the jury to that effect. The two brothers appealed.
Continue Reading Court Holds That Promissory Note Did Not Allow Partial Conversion To Equity

In Novedea Sys. v. Colaberry, Inc., co-founders of a business discussed terms of a buy-out, but ended up in litigation. No. 6:20-cv-00180-JDK, 2021 U.S. Dist. LEXIS 152372 (E. D. Tex. August 13, 2021). One co-founder sued on his behalf and on behalf of the company against the other co-founder without discussing the suit with the other co-founder or the board of directors. The defendant filed a motion for summary judgment, arguing that the plaintiff did not have authority to file a lawsuit for the company. The plaintiff responded that his “authority derives from his standing “as a longtime manager and corporate officer” of Novedea, or alternatively, as a shareholder bringing a derivative action.” Id.
Continue Reading Court Holds That Shareholder Derivative Suit May Proceed Against An Officer Without A Pre-Suit Demand Where The Case Involved A Closely-Held Corporation

David F. Johnson presented his paper “Business Divorce: Minority Shareholder Rights In Texas” to the State Bar of Texas’s Business Disputes Course on September 2-3, 2021. This presentation addressed shareholder oppression claims in Texas, minority shareholder rights (such as contractual rights, stock rights, disclosure rights, distribution rights, employment rights, and receivership rights), fiduciary duties in

The owners of a corporation may enter into shareholder agreements. In Richie, the Texas Supreme Court stated: “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.” Ritchie v. Rupe, 443 S.W.3d 856, 871 (Tex. 2014).

Regarding shareholder agreements, the Texas Business Organizations Code provides:

(a) The shareholders of a corporation may enter into an agreement that: (1) restricts the discretion or powers of the board of directors; (2) eliminates the board of directors and authorizes the business and affairs of the corporation to be managed, wholly or partly, by one or more of its shareholders or other persons; (3) establishes the individuals who shall serve as directors or officers of the corporation; (4) determines the term of office, manner of selection or removal, or terms or conditions of employment of a director, officer, or other employee of the corporation, regardless of the length of employment; (5) governs the authorization or making of distributions whether in proportion to ownership of shares, subject to Section 21.303; (6) determines the manner in which profits and losses will be apportioned; (7) governs, in general or with regard to specific matters, the exercise or division of voting power by and between the shareholders, directors, or other persons, including use of disproportionate voting rights or director proxies; (8) establishes the terms of an agreement for the transfer or use of property or for the provision of services between the corporation and another person, including a shareholder, director, officer, or employee of the corporation; (9) authorizes arbitration or grants authority to a shareholder or other person to resolve any issue about which there is a deadlock among the directors, shareholders, or other persons authorized to manage the corporation; (10) requires winding up and termination of the corporation at the request of one or more shareholders or on the occurrence of a specified event or contingency, in which case the winding up and termination of the corporation will proceed as if all of the shareholders had consented in writing to the winding up and termination as provided by Subchapter K; (11) with regard to one or more social purposes specified in the corporation’s certificate of formation, governs the exercise of corporate powers, the management of the operations and affairs of the corporation, the approval by shareholders or other persons of corporate actions, or the relationship among the shareholders, the directors, and the corporation; or (12) otherwise governs the exercise of corporate powers, the management of the business and affairs of the corporation, or the relationship among the shareholders, the directors, and the corporation as if the corporation were a partnership or in a manner that would otherwise be appropriate only among partners and not contrary to public policy.

(b) A shareholders’ agreement authorized by this section must be: (1) contained in: (A) the certificate of formation or bylaws if approved by all of the shareholders at the time of the agreement; or (B) a written agreement that is: (i) signed by all of the shareholders at the time of the agreement; and (ii) made known to the corporation; and (2) amended only by all of the shareholders at the time of the amendment, unless the agreement provides otherwise.


Continue Reading Shareholder Agreements Are Very Powerful In Texas: Parties Should Carefully Review Those Agreements Before Obtaining Stock In A Corporation

In Adam v. Marcos, an attorney and his client agreed to a joint venture/partnership. No. 14-18-00450-CV, 2021 Tex. App. LEXIS 2060 (Tex. App.—Houston March 18, 2021, no pet. history). The attorney sued the client for breaching the agreement. The trial court ruled for the client on the attorney’s breach of the partnership agreement claim and a breach of fiduciary duty claim. The court of appeals affirmed. The court of appeals first held that the partnership agreement was presumptively invalid because the attorney owed fiduciary duties to the client when it was entered into:

Contracts between attorneys and their clients negotiated during the existence of the attorney-client relationship are closely scrutinized. Because the relationship is fiduciary in nature, there is a presumption of unfairness or invalidity attaching to such contracts. The burden is on the attorney to prove the fairness and reasonableness of the agreement. Moreover, as a fiduciary, Marcos had the burden to establish that Adam was informed of all material facts relating to the agreement. Additional important factors in determining the fairness of a transaction involving a fiduciary include whether the consideration was adequate and whether the beneficiary obtained independent advice.

Id. The court of appeals held that the jury’s finding of breach of duty by the attorney supported invalidating the partnership agreement: “Because the jury found that Marcos failed to fulfill his fiduciary duties to Adam in regard to the alleged partnership agreement, and the evidence supports that finding, the presumption that the contract was invalid applies. Thus, the trial court did not err in holding the agreement was invalid and unenforceable.” Id.
Continue Reading Partnership Agreement Was Invalid Where IT Was Entered Into Between A Fiduciary And Principal And Was Otherwise Unfair And The Principal Did Not Owe Fiduciary Duties As A Partner Where There Was No Enforceable Partnership

In TSA-Tex. Surgical Assocs., L.L.P. v. Vargas, one partner sued his other partners for various claims regarding the defendants attempt to squeeze the plaintiff out of the partnership. No. 14-19-00135-CV, 2021 Tex. App. LEXIS 1330 (Tex. App.—Houston [14th Dist.] February 25, 2021, no pet. history). The defendants filed a motion to dismiss under the Texas Citizens Participation Act (TCPA), and the trial court denied the motion. The defendants appealed.

The TCPA was enacted “to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Id. (citing Tex. Civ. Prac. & Rem. Code § 27.002). It does so by authorizing a party to file a motion to dismiss a legal action that “is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association.” Id.

The court of appeals affirmed the denial of the motion to dismiss under the TCPA. The defendants argued that the plaintiff’s claims were based on, related to, or in response to the exercise of free speech because the claims purportedly involve communications regarding the provision of medical services. The court of appeals disagreed:
Continue Reading Business Divorce: Court Affirms Denial Of SLAPP Motion Regarding Partnership Divorce Suit

A business divorce may mean that the owners need to sell the business or the business’s assets. In the following case, some of the owners/officers took advantage of a sale transaction to benefit from that transaction at the expense of their co-owners. In Rex Performance Prods., LLC v. Tate, a company sued its former officers for breaching fiduciary duties related to the sale of the company’s assets. No. 02-20-00009-CV, 2020 Tex. App. LEXIS 10465 (Tex. App.—Fort Worth December 31, 2020, no pet.). The company alleged that the officers intentionally drove down the price of the sale in order to obtain a separate bonus from the buyer. The defendants alleged that the plaintiff knew of the side bonus agreement and consummated the transaction anyway, thereby establishing a waiver or ratification. The trial court granted summary judgment for the defendants, and the plaintiff appealed.
Continue Reading Court Found That There Was A Fact Question On Whether Officers Violated Fiduciary Duties By Obtaining A Side Bonus From A Purchaser When Negotiating A Sale Of The Company’s Assets

Last week, the Dallas Court of Appeals overturned a $98 million trial court judgment, which was based on a jury finding that BBVA USA (BBVA) had defrauded one of its commercial borrowers.[1]  See BBVA, et al. v. Bagwell, et al., Dallas App. Ct., No. 05-18-00860, December 14, 2020). [2]  The appellate court concluded the jury’s verdict had to be reversed because, as a matter of law, BBVA’s borrower could not have justifiably relied on allegedly false statements that had been made to the borrower by a representative of the bank.  The Court’s holding and its focus on the element of “justifiable reliance” as a contractual defense to a fraud claim provides valuable guidance for private company majority owners in regard to their relationship with their minority business partners.

In light of the Bagwell decision, this post reviews key provisions that majority owners may want to include in their company governance documents to avoid future claims that may be made against them by their minority co-owners for fraud and/or for breach of the fiduciary duties that majority owners owe to the company acting in their capacity as governing persons. These provisions can be included in the company’s governance documents—in the by-laws of the corporation or in a company agreement for LLC’s—and they concern matters that frequently become the subject of disputes between private company co-owners.

Withholding of Profits Distributions/Dividends

 One frequent area of conflict between majority owners and minority investors concerns the issuance of profits distributions.  Private companies are typically “pass through” entities in regard to income taxes, which means that the business does not pay any taxes on the income that it generates and all taxes on the company’s income are paid by the business owners based on the percentage of their ownership interest.  While majority owners may routinely issue distributions to the company’s owners to cover the amount of their tax liability that is attributable to income generated by the company, majority owners will want to retain flexibility to decide whether or not to issue profits distributions and, if so, in what amounts.
Continue Reading BBVA USA Receives Holiday Gift From Dallas Appellate Court:  The Decision Includes Guidance for Private Company Owners 

Under Texas law, when the owners of closely held companies have co-investors, they need to exercise care in managing their business. This need for caution is due in large part to a Texas statute that makes it easier for minority shareholders or minority members of LLC’s (“Minority Owners”) in closely held companies to file derivative lawsuits alleging claims for breach of fiduciary duties against the company’s officers, directors and/or managers (“Control Persons”).  See Tex. Bus. Org. Code (“TBOC”) §§ 21.551 and 101.451-463.   This derivative Texas statute removes substantial procedural barriers that would otherwise exist for Minority Owners in filing a derivative lawsuit, and it has been the subject of our previous posts. (Read:  Shareholder Oppression Claims)

When Minority Owners file derivative claims for breach of fiduciary duties against the company’s Control Persons, however, the Control Persons have significant defenses available to them under Texas law.  These “safe harbor” defenses were highlighted in a recent decision by the Austin Court of Appeals, which dismissed most of the shareholders’ claims.  See Roels v. Valkenaar, No. 03-19-00502-CV Tex App. Lexis 6684 (Tex. App. – Austin, August 20, 2020, no pet. history).  This post reviews the appellate court decision in Roels, and the court’s analysis of the minority shareholders’ claims for breach of fiduciary duty and the available defenses to these claims is helpful for both Control Persons and shareholders to understand.
Continue Reading Navigating Safe Harbors: Review of the Protections Provided to Governing Persons by the Texas Interested Party Statute and the Business Judgment Rule

Small, private companies are often viewed as a key to the growth of the GDP in the U.S. Even small companies quickly realize, however, that they are competing for business not just in their own neighborhood, but as part of a global marketplace. Therefore, when companies enter into contracts with other firms doing business in different states or countries, they often include terms in their agreements to select both the state in which to litigate any future disputes between them (choice of forum), as well as the county in which the litigation will take place (choice of venue). This post considers whether these choice of forum and choice of venue provisions the parties opt to include in their contracts will be deemed enforceable under Texas law.
Continue Reading Under Texas Law, You Can Have Your Cake, But Not Always Eat it Too: Choice of Forum Clauses Are Enforceable, Choice of Venue Has Limits