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:
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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.
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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.
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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.
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