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.
Continue Reading Tricks Not Treats: Good Faith Promises to Perform Don’t Hold Up in Shareholder Buy/Sell Agreements Under Texas Law