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
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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

Many Texas lawyers and their private company clients continue to refer to the claim for shareholder oppression as if it remains a viable cause of action under Texas law. And yet, for all practical purposes, the claim for minority shareholder oppression met its demise more than five years ago in 2014 in Ritchie v. Rupe[1]. In this landmark decision, the Texas Supreme Court held that a court-ordered buyout of the minority owner’s interest in a private company was not a remedy that was available under either Texas statutes or common law in response to oppressive conduct by the company’s majority owner(s).

The myth of the claim for shareholder oppression in Texas persists, because there is a lingering reference to oppression in the Texas Business Code [2], and because there is a strong continuing need for this type of remedy in response to majority owners who engage in conduct that is oppressive to minority shareholders or LLC members. [3] In Rupe, the Supreme did leave open the possibility that a court-ordered buyout could be a remedy for a breach of fiduciary duty committed by majority owners. The door that was left open to this remedy in Rupe, however, is not one that lower courts have been willing to walk through in granting or upholding a buyout remedy for the minority investor based on the majority owner’s breach of fiduciary duty.

Looking past the myth of claims for shareholder oppression, the legal remedy most often pursued by minority shareholders since Rupe is a claim for breach of fiduciary duty that is filed on a derivative basis. These derivative claims are the subject of this post.

Post-Rupe Shareholder Derivative Claims 

A shareholder derivative lawsuit based on breaches of fiduciary duty by the company’s majority owner is the chief legal weapon that remains available to minority owners (shareholders and LLC members) after Rupe. Minority owners have grounds to bring this claim when majority owners put their own self-interest ahead of the company’s best interests, which constitutes a breach of their duty of loyalty. In a derivative suit, therefore, the minority shareholders seek recovery for harm the company suffered as a result of the majority owners’ self-dealing.
Continue Reading Shareholder Oppression Claims: Looking Past the Urban Myth to Remedies that Continue to Survive Under Texas Law

By Ladd Hirsch[1]

Spousal consent provisions are commonly found in the governance documents of private businesses, e.g., corporate bylaws, limited partnership and LLC agreements.  Private company owners include these consent provisions in their agreements, because they do not want to find themselves suddenly stuck with a new business partner when one of their co-shareholders, partners or members goes through a divorce.  Whether the spousal consent provision will hold up in court when challenged by a spouse claiming unfair treatment, however, depends on a number of factors, and the frequent use of these provisions provides no safe harbor.

This post examines the legal considerations a court will focus on when a spousal consent provision is challenged in a divorce proceeding and also considers issues that arise when the company seeks to enforce the provision against a divorcing spouse.  We conclude the post by offering suggestions for drafting a more effective (enforceable) consent provision.
Continue Reading Family Law Post:  Till Death Do Us Part, But Will The Spousal Consent That My Spouse Signed in Our LLC Agreement Hold Up in Our Divorce

The flight attendants on commercial flights notify passengers where the exits on the plane are located. Fortunately, the vast majority of air travelers never have to put this advice to use.  In private companies, however, business partners head for the exits far more frequently as over the past decade, less than half of startup businesses survived longer than five years, and just one-third lasted for more than ten years.

Our previous post discussed steps business partners can take to avoid and resolve disputes. This post confronts the situation in which business partners conclude they cannot resolve their conflicts, and one or more of them decides to exit from the business. While breaking up can be hard to do, it should not threaten the company’s continued existence, particularly if the owners had previously negotiated and adopted a “corporate pre-nup” that will guide a partner’s departure from the business.
Continue Reading Business Partner Exits (Part 2): Breaking Up is Hard to Do, Especially When Partners Do Not Adopt an Exit Strategy