Owing a substantial minority stake in a privately held Texas company can be an exciting, profitable experience. Minority investors may get in on the ground floor of a new company. Investments in fast growing private businesses often have a strong financial upside and they may be truly ground-breaking in their industry — think of Uber, Snapchat, AirBNB and Dropbox to name a few. And yet, private company investments can also be notably high-risk endeavors, the company is generally not as regulated; it may be controlled by majority owners who are unscrupulous and if investors are not careful, they may find themselves locked into ownership in the business with no exit—no way to monetize their illiquid interest in the company. Recall the hit movie, Social Network, which depicted the plight Eduardo Saverin, whose ownership in Facebook was substantially diluted. This led to heated litigation with Mark Zuckerberg, the well-known founder, and ultimately, a pricey settlement.
Overview of Experience and Pragmatic Approach to Legal Conflicts
Winstead Business Divorce lawyers represent minority investors who have substantial investments in all kinds of private Texas companies (LLC’s, S corporations and limited partnerships) in a wide variety of different industries that include technology, real estate, manufacturing, energy, banking, health care/pharmaceutical, insurance, construction, restaurants and online sales. We are retained to assist minority investors when their rights are abused by the company’s majority owners, which can arise in a variety of ways.
Some of our investor clients have been improperly forced out of the business, others have been denied the opportunity to receive their fair share of profits from the company and others have been barred from actively participating in the management or operation of the business without the proper procedures being followed. In many cases, the majority owners exploited their control over the business to engage in acts of self-dealing for their own benefit in breach of the fiduciary duties that they owe to the company.
In all cases, we work closely with our minority investor clients to determine their business goals, and we then develop and aggressively implement a detailed, customized plan to achieve those objectives. Legal action may be necessary in some matters, and our lawyers have extensive experience in state and federal courts, as well as in arbitration proceedings. Our approach, however, is that legal action should not be the first option when conflict arises. Instead, we view litigation as an important tool, but one that is to be deployed by the minority investor only when the majority owner has refused to negotiate a reasonable business solution that will achieve a win-win Business Divorce that is in all of the parties’ best financial interests.
Scope of Services for Minority Investors
Winstead Business Divorce lawyers provide a broad array of services for our minority investor clients, including all of the following:
- Preparing Exit Plans – buy/sell agreements and redemption contracts
- Reviewing and negotiating executive employment agreements
- Issuing books and records requests to obtain financial/business records
- Securing and documenting Business Divorce exits from the company
- Modifying corporate governance documents, e.g., Bylaws, LLC Agreements
- Litigating claims against majority owners (and officers and directors)
At the end of the cycle, when the time comes for an exit from the business, we help the investor to secure a buyout on favorable terms either voluntarily, or when necessary, through legal action to enforce and protect our client’s rights as minority owners. In litigation matters, we often retain and work closely on behalf of our clients with well-qualified expert witnesses, who include forensic auditors and business valuation professionals. These experts are engaged to determine the scope of wrongdoing by majority owners and assess the value of the minority-held ownership interest in the business. Our focus remains at all times on securing a result that meets the clients’ business objectives as promptly as possible, and on a cost-effective basis.
We assist our minority investor clients from the time that they first consider an investment in a privately-held company all the way through their exit from the business. We negotiate the terms under which they acquire their interest in the company and take steps to assure the investor obtains a binding contract exit plan. When information is improperly withheld from the investor, we assist our clients in obtaining access to books and records to be able to evaluate the company’s performance and the value of their minority stake in the business.
Representative Cases – Minority Investors
- (Software) Ladd Hirsch was lead counsel in prosecuting civil claims in Dallas state district court for the co-founder and 47% owner of ARGO Data Resources based in Dallas. After a six-week jury trial, the trial team that was led by Ladd secured a court-ordered, mandatory dividend of $85 million awarded to the Company’s two shareholders based on jury findings that the majority owner of ARGO had engaged in fraud, shareholder oppression and improper withholding of dividends to the shareholders. The jury verdict was overturned on appeal, and the appellate decision was upheld by the Texas Supreme Court. Shagrithaya v. Martin, et al., No. 07-15149-I.
- (Real Estate) Ladd Hirsch represented a minority investor in a Dallas-based real estate firm after numerous conflicts and claims had arisen among the owners following the succession of new management of the company. Ladd was able to secure a confidential, structured buyout of the minority owner’s full interest that avoided litigation of the client’s claims.
- (Recruiting Services) Lawyers with the firm represented the minority owner of Dallas-based professional recruiting company who had been forced out of the business by the majority owners. After litigation was filed in state district court in Dallas, Ladd secured a confidential settlement of the minority owner’s claims, which resulted in a dismissal of the lawsuit. Heather Carson v. Janine Lewis, et al., Cause No. DC-17-07051, in the 14th Judicial District Court, Dallas County, Texas
- (Oil and Gas). Ladd Hirsch was lead counsel in litigation for minority owner of energy related company in Midland, Texas. In the lawsuit, the minority owner filed claims for breach of fiduciary duty and contended he had been wrongfully removed from the company by the majority shareholder. After discovery and motion practice in the case, Ladd secured a confidential settlement for the minority owner before trial. Solansky v. Solansky, et al., Cause No. CV48169.
- (Restaurants) Ladd Hirsch was lead counsel for minority owner in defense of lawsuit filed in Dallas state court against founder of Dallas-based restaurant chain. On behalf of the minority owner, Ladd negotiated the resolution of all claims alleged in the lawsuit and secured a confidential buyout of the minority owner’s interest in the business. M. Crowd Restaurant Group, et. al. v. Michael Rodriguez, et. al., Cause No. CC-09-00965-G.
- (Beer Distributorship) Ladd Hirsch served as lead counsel in state court lawsuit filed in Houston for three limited partners in private beer distributorship. In the lawsuit on behalf of the limited partners, Ladd asserted claims that the company’s general partner had wrongfully refused to pay these limited partners their fair share of the proceeds resulting from the sale of the business. After conducting extensive discovery and engaging in motion practice, Ladd was able to negotiate a confidential settlement of all claims asserted for the three minority owners before trial. Joseph Polichino, et al. v. Hillman International Brands, Ltd. Et al. No. 2004-346878.
- (Trust Dispute) Ladd Hirsch was lead counsel in securing a multi-million pre-trial buyout of minority owner’s substantial interest in a family real estate and oil and gas business that involved multiple trusts. This buyout and settlement was achieved after Ladd filed suit for the minority owner in Dallas state district court, conducted discovery, and secured a summary judgment ruling on the minority owner’s behalf holding that the General Partner and Trustee had breached his fiduciary duties. Pickens v. Pickens, et al., No. 02-01105.
- (Insurance) Ladd Hirsch was lead counsel for limited partner in insurance agency in filing litigation against the General Partner in efforts to secure the full value of the limited partner’s minority ownership interest in the business. After suit was filed in Tarrant County, Ladd secured a confidential settlement and buyout of the limited partner’s ownership interest in the company. Grob v. Texas Wasatch Insurance Holdings Group, LLC, et al., No. 352-249603-10
- (Investment Fund) Ladd Hirsch represented a minority owner with interest in private investment fund focused on investing in low income housing in foreign markets with US government support. The minority owner client was forced out of the business, and after protracted negotiations, Ladd secured a confidential settlement and buyout of the minority owner’s interest, which avoided litigation.
Representative Cases – Family Law Matters
Lawyers with Winstead’s Business Divorce team work closely with Texas family law attorneys in marital divorce cases that involve sizable marital estates, which include ownership interests in Texas private companies and private trusts. In family law matters, the Winstead’s lawyers assist family law counsel by helping to structure, negotiate and document the terms of a Business Divorce between the parties in the divorce proceeding in a manner designed to maximize the financial outcome for all parties. To maintain the confidentiality required in many family law cases, the matters listed below do not disclose the identity of any parties.
- (Commercial Real Estate) This marital estate included numerous large interests in commercial real estate projects in both Texas and other states. The couple had entered into a marital agreement during their marriage (a post-nup), which provided for a property division of the marital estate in the event of a divorce. Under the terms of this post-nup, the husband continued to retain control over the couple’s community property after the divorce became final, and this continued right of control was challenged in the parties’ settlement negotiations. Ladd Hirsch was retained to assist the client and family law counsel in negotiating a revised marital property agreement that addressed the client’s business concerns in the divorce. This new agreement provided for a long-term, structured buyout of the client’s interest in the community estate.
- (Real Estate – Undeveloped Land) The couple in this divorce matter owned several large tracts of raw, undeveloped land, and conflicts arose regarding the potential for increases in the real estate’s value based on anticipated future zoning changes. Ladd Hirsch was able to help resolve these business conflicts by working with family law counsel to negotiate a structured divorce settlement providing for payments tied to the future sale of the property under differing parameters for the sale.
- (Oil & Gas) The principal asset in this divorce was a minority interest in a private company that produced substantial amounts of raw materials used in the oil and gas industry. Based on the illiquid nature of this minority ownership interest, the couple’s divorce settlement required Ladd Hirsch to help negotiate a long-term structured payout for the non-controlling spouse. This payment structure that included both a floor and a ceiling in terms of the ultimate amount to be paid under the divorce settlement. Ladd also assisted the client in the ultimate buyout of the wife’s interest years after the original divorce settlement.
- (Private Company VA Hospitals) In this marital estate, the couple had made substantial investments in privately held companies that owned land and buildings, and which had entered into long-term lease agreements to operate these facilities as VA hospitals. In multiple mediated settlement negotiations, Ladd Hirsch worked closely with financial and tax advisors retained for the client to help structure a favorable division of the marital assets, which included analysis of issues related to this particular asset class, including various tax, real estate and financial items.
- (Collateralizing Alimony Obligation) This divorce settlement included a commitment by one spouse to provide the other with a lifetime spousal support benefit. This long-term payment obligation set forth in the decree needed to be protected by some form of collateral. In the discussion of settlement, Ladd Hirsch provided family law counsel with alternative methods for collateralizing the support obligation to permit the couple to conclude their divorce settlement on mutually acceptable terms.
- (Private Company Investments) The crux of this divorce settlement involved a division of the couple’s ownership interest in multiple minority investments that they had made in a number of private companies. The settlement was achieved by creating a new trust in which to transfer all of the private company ownership interests. One spouse was named the trustee with both spouses serving as trust beneficiaries. The trust agreement protected the ownership interest of the non-controlling spouse while allowing both spouses to benefit from the anticipated appreciation in the value of the assets held in trust.