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“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

Recognized by Texas Bar Today’s Top 10 Blog Posts

“Impostor syndrome is the voice in your head that overlooks, discounts and discredits your accomplishments.”

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

Next to physical survival, the greatest need of a human being is psychological survival—to be understood, to be validated,
to be appreciated.

William Covey, 7 Habits of Highly Effective People
____________________________________

The deepest principle of human nature is a craving
to be appreciated.

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:

“Gratitude is something that we don’t normally think of as a business fundamental. With lean operations and the focus on the bottom line, most organizations don’t take the time to weave gratitude and appreciation into their business strategies.  But without gratitude, teams begin to break down, clients stop returning, morale takes a turn for the worse, and your business partners will start to lean away.” (Read)

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:

“. . . evidence suggests that gratitude and appreciation contribute to the kind of workplace environments where employees actually want to come to work and don’t feel like cogs in a machine.” (Read)
“Feeling genuinely appreciated lifts people up. At the most basic level, it makes us feel safe, which is what frees us to do our best work. It’s also energizing. When our value feels at risk, as it so often does, that worry becomes preoccupying, which drains and diverts our energy from creating value.”  (Read)

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:

“A culture of gratitude in the workplace is just as critical in personal practice.  It can drive productivity, employee retention, wellness and engagement.  Instituting gratitude at work is something anyone can do, from front-line team members to the CEO.  Gratitude is viral, once people see appreciation catching, they are likely to jump in an keep it going.”  (Read)

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

Like fish need water in which to swim, private company owners need to secure capital on an almost continuous basis.  Capital is necessary to develop the company’s products and services, to retain top talent and to market and promote the business.  But securing capital from outside investors can cause headaches for company founders when conflicts later arise with new investors who have discordant views about the company’s strategy and business plans.  For this reason, business owners are wise to accept investments from third parties only when specific conditions are in place designed to prevent and/or resolve later conflicts that threaten the company’s continued existence. This post reviews key terms company owners should consider including in their governance documents or in separate agreements with the new investors to ensure that the majority owners maintain full control over the company.

Secure Buy-Sell Agreement With Investors

If relationships with new investors turn south and the minority investors become a thorn in the side of the company’s majority owners, they will want to have the right to remove these new investors by redeeming all of their ownership interests in the business.  This redemption right to exit minority investors will be available to the company’s owners, however, only if they secure a signed written agreement from the new investors at the time they make their investment in the company.  If the majority owners fail to secure this redemption right from new investors when the investment that is made in the business, the owners may find themselves stuck with unwelcome investors.  Without a redemption right in place, the majority owners have no ability to remove from these co-owners from the business.
Continue Reading Cautionary Note for Private Company Owners: Third Party Investors Can Create Thorny Problems

Entrepreneurs with visions of taking their company public one day may look forward to announcing their IPO by ringing the bell at the stock exchange on Wall Street and celebrating at an extravagant closing dinner with the founder team. These heady pre-IPO dreams may quickly run into a number of significant real world challenges, however, that are regularly faced by the management of public companies.  This blog post reviews some of the serious issues that public firms regularly confront, which should be weighed carefully by private company owners before they decide to move into the public market.

The Cost Factor – Public Companies Are Extensively Regulated

The vast difference in the way that public and private companies are managed results from the extensive federal regulations that govern the operation of public firms.   Moving into the public realm requires the company’s management to learn an entirely new language filled with acronyms, e.g., just a few of these are Sarbanes Oxley (SOX), the Securities & Exchange Commission (SEC) and the Federal Trade Commission (FTC).  The dictates of federal law and the regulations promulgated by federal agencies will require the company to engage in detailed internal compliance procedures, file financial reports, accept audits by independent third parties of their financial performance and abide by operating requirements that did not exist when the company flourished as a private, closely-held business.

While a successful IPO will generate a sizable financial war chest, there are trade offs that should be considered by the company founders.  Once the company owners successfully take the business public, their management team will be required to spend more time and incur much greater expense complying with the federal regulatory scheme.   Research indicates that the cost for a small company to enter the IPO marketplace averages about $2.5 million. And after a small-cap company becomes public, it can then expect to pay an average of about $1.5 million annually in compliance costs.  (Read: The Cost of Regulation on Small-Cap Companies)   
Continue Reading The IPO Dreams Of Private Company Owners: Reality Awaits – Champagne Toasts or Unrelenting Stress

The private company marketplace has become increasingly attractive to investors as the number of opportunities for investment has vastly expanded.  There are approximately 6 million companies in the US, but less than 1% are publicly traded on a national stock exchange and more than 85% of businesses with more than 500 employees are privately owned.  The attraction for investors is that private companies hold the potential to yield robust financial returns due to the fact that many private companies are family-run businesses with stable management and a long-term focus on growth.  As a result, McKinsey reports that private companies have outperformed the S&P 500 Index by an average of about 3 percentage points over the past ten years.

The counter argument is that private company investing can be risky.  The downsides include the potential for the loss of the investment when start-ups and early stage companies fail as more than 50% do not survive three years.  There is also a much greater potential for fraud as private companies are substantially less regulated than public businesses.  In addition, as private companies continue to raise capital, the investor’s ownership interest may be diluted unless the investor makes additional capital contributions.  Finally, the investment may be “dead money” for an extended period with no dividends being declared, which requires the investor to wait for years to receive any return on the investment.

The opportunity to invest in private companies therefore presents investors with a classic risk/reward scenario.  While a private company investment opens the door to the possibility of securing outsize financial returns, this potential can be realized only if the investor is willing to accept a much higher degree of risk.  Whether any private company investment is a good bet is beyond the scope of this post and the terms of an investment agreement cannot eliminate this business risk.  But an investor who obtains the contract terms that are discussed in this post in the investment agreement will be poised to secure all of the intended benefits of the investment if the company does achieve success in the future.

These investor-friendly provisions can be included in a shareholder agreement, in a LLC company agreement, in a limited partnership agreement or in the company’s original or amended bylaws.   The checklist that follows is not intended to be exhaustive of all terms that are included in an investment agreement, but it includes some of the most essential terms designed to protect the rights of investors who make private company investments. 
Continue Reading Invest With Caution: Top 10 Checklist For Investors Purchasing Interests in Private Companies

Following Supreme Court arguments last month, the final chapter in the long-running legal battle between Energy Transfer Partners LP (“ETP”) and Enterprise Products Partners (“Enterprise”) is finally coming to an end. ETP is requesting the Texas high court to reinstate the $535 million judgment it obtained after a jury trial against Enterprise in 2014. The case presents critical issues regarding the manner in which a Texas partnership can be formed, and the importance of these questions for business owners and the size of the judgment have made this a closely watched legal conflict since the jury issued its verdict more than 5 years ago.

This post reviews the issues at stake in the ETP litigation and explains our prediction that the Supreme Court will not reverse the decision issued by the Dallas Court of Appeals in 2017, which unanimously overturned the jury’s verdict and held that no partnership ever arose between ETP and Enterprise.  We expect the Court to rule that in light of the written conditions the parties had expressly agreed in writing must be met before a partnership would be formed between them, the contention that a partnership arose by their conduct is a dog that won’t hunt.

In the Beginning – A Brief Case Summary

The ETP case against Enterprise stems from a dispute over a highly profitable pipeline, which the parties considered pursuing together as a joint venture.  The dispute and claims arose when Enterprise changed course and signed on to do the pipeline deal with Enbridge, based in Canada.  ETP claimed that it had been jilted by its business “partner” in breach of Enterprise’s fiduciary duties, argued successfully to the jury that the parties had entered into a partnership agreement based on their conduct and oral statements.  The jury agreed and awarded damages of more than $300 million to ETP, but the figure grew to $535 million figure by the time that the final judgment was entered in the case.
Continue Reading ETP v. Enterprise: Texas Partnership Created by Conduct — A Dog That Won’t Hunt