David F. Johnson co-presented “Minority Investor Rights in Private Companies: Buy-Sell Agreements, Court-Ordered Buyouts, Breach of Fiduciary Duty” for a nationwide audience for Stafford Webinars on January 20, 2021. David was honored to present with Peter A. Mahler and Peter J. Sluka from Farrell Fritz, PC from New York. The presenters discussed the rights of
Cautionary Note for Private Company Owners: Third Party Investors Can Create Thorny Problems
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.
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Tricks Not Treats: Good Faith Promises to Perform Don’t Hold Up in Shareholder Buy/Sell Agreements Under Texas Law
Minority investors who purchase an ownership interest in a private Texas company are advised to secure an exit strategy confirmed in a Buy/Sell Agreement at the time they make their investment. But investors who look closely at the specific terms of their Agreement may find that the contract contains an unwelcome surprise if it includes “good faith” obligations that have been accepted by the majority owner or by the company. While good faith may sound attractive on paper, a recent Texas Supreme Court decision holds that a promise to act in good faith does not reflect a binding commitment and is not enforceable. See Dallas Forth Worth International Airport Board v. Vizant Technologies, LLC, 2019 WL 2147262 (Tex. May 17, 2019).
The specific terms of Buy/Sell Agreements between owners and investors in private Texas companies are of critical importance, and this post reviews how the Supreme Court’s decision in the Vizant case earlier this year may impact the rights of owners/investors.
The Vizant Case Holding
The Vizant case did not involve a dispute between business co-owners, but the Court’s decision is nevertheless significant to contracts between business partners. In the lawsuit, Vizant Technologies sued the D/FW Airport Board (the “Board”) contending that the Board had failed to follow through on a good faith promise in a consulting agreement, which potentially provided additional compensation for Vizant. In the contract, Vizant agreed to provide consulting services related to credit-card processing for a capped fee of $50,000, but the terms of the contract also included a “good faith” promise. Specifically, the Board had agreed to make a good faith effort to increase the amount of the fees to be paid to Vizant if the consulting services that it provided under the contract exceeded the amount of the fee cap.
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Just in Time For Summer: The Freeze-Out Merger, A Legal Option Available to SOME Majority Owners of Privately-Held Texas Companies
By Zack Callarman and Mark Johnson
Our previous posts have stressed the critical importance of buy-sell agreements for both majority owners and minority investors in private companies (Read here). For majority owners, securing a buy-sell agreement avoids the potential of becoming “stuck” in business with a difficult co-owner without the ability to force…