Business Partnership

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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

There are many reasons for business owners to consider adding new partners, including to secure additional capital, to add needed expertise to help grow the company, to bring family members or close friends to join in building the business and to put a succession plan in place. Adding new partners can therefore provide a boost to the company’s revenues, lighten the load carried by the founder, and put the business on course for long-term success.  But this decision is not without risk because the new business partners may create conflicts, disrupt the business and insist on making changes that put the company’s existence in peril.

If after carefully weighing the pros and cons, business owners decide to move forward in adding new partners, this post reviews important steps they can take to protect themselves and the business from the decisions and actions of these new stakeholders in the company.

Equity Ownership Can Be Conditional or Subject to Cancellation

One protective step business owners can take when adding a new partner is to make the addition of a new partner’s ownership conditional or subject to cancellation. This approach permits the owner to wait to grant the ownership interest in the company to the new partner until he or she has met specified business goals by a certain date or to cancel the grant of equity to the new partner if the specific goals have not been achieved by the agreed date.
Continue Reading Keeping Eyes Wide Open When New Members Join the Pack: A Cautious Approach to the Addition of New Business Partners

The number of businesses that fold due to bad partnerships is staggering.  In some cases, they are charlatans, in others inept business people, and others find themselves unable to scale with any growth.

—Michael E. Gerber, World’s No. 1 Small Business Guru according to Inc. Magazine.

For all the success stories of start-up businesses that made it big, they are far outnumbered by the many companies that failed to achieve lasting success.   According to the U.S. Bureau of Labor Statistics, approximately 50% of new companies are out of business within five years, and only one-third of new businesses last for a full 10 years.  The causes of these failures are many, but one of the biggest challenges that new, jointly-owned businesses face are conflicts between the company’s owners—it is difficult for any business to survive a bad partnership.

While the importance of finding a good business partner is well-known, what is less understood are the characteristics of a good business partner.  Our views on this important issue are based on experience.  In our Business Divorce practice, we have worked with both owners and investors in  hundreds of private companies, and this vantage point has allowed us to observe first-hand both remarkable business successes, as well as epic company failures.  From our position in the trenches advising owners and investors, we have concluded that the best business partners are: accountable, adaptable and accessible.  This post takes a look at these three traits in more depth.
Continue Reading With Friends Like These, Enemies Aren’t Needed: Character Traits of Great Business Partners