Entrepreneurs launching new companies today take on a significant gamble, because statistics show that roughly 30% of all new start-ups fail within two years, and only half survive for a full five years.  Many businesses fail due to the owners’ inability to meet the challenges of the marketplace, but some start-ups shut down when conflicts arise within the ownership group.  Companies can go under over these ownership disputes even when their governance documents include dispute resolution provisions—if these terms fall short of keeping the business intact.

Given the many business risks that business entrepreneurs face, they should not also have to accept the gamble that a future serious conflict with their co-owners will torpedo the business.   This post therefore focuses on dispute resolution terms that are designed to resolve ownership disputes, but which will preserve the continued operation of the business.  While not fool-proof, the best mechanism for resolving ownership conflicts in our experience on a prompt, confidential and cost-effective basis is through a set of well-crafted fast track arbitration provisions.  These arbitration terms are included in the company agreement (LLC’s), in the bylaws (corporations) or in the limited partnership agreement (limited partnerships), and they are discussed below.

Faster – Prompt Date for Final, Evidentiary Hearing

Litigation will often drag on for months and, in some cases, years, and at great cost.  By contrast, arbitration is a dispute resolution procedure that is created by agreement of the parties, and as a result, the parties can choose to adopt a specific timetable in their arbitration provision that requires the final arbitration hearing to take place on a prompt schedule.  The manner in which a fast-track schedule for the arbitration hearing plays out is described below.

After one of the parties files a demand for arbitration, the arbitration company, which is typically either AAA or JAMS, will assist the parties in selecting the arbitrator, or if the parties opted for a panel, a panel of three arbitrators, to preside over the dispute.  Once the arbitrator or the arbitration panel is appointed, a scheduling conference will be held promptly, and the date for the arbitration hearing will be set at that time.  If the parties require the hearing date to take place within a specified period in the arbitration provision, e.g., 60 or 90 days, the arbitrator or panel will enforce the parties’ agreement and adopt the schedule to which they agreed.  In short, the parties will get what they bargained for, a prompt hearing with no delays/continuances.  
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By Brad Monk and Ladd Hirsch

People change, and not always for the better. Which leads to the question:  what is the best course of action when a trusted business partner turns out to be a rotten egg?  The answer is not easy, but usually the best course of action is to promptly remove an untrustworthy partner from ownership in the business and also from participation in the company’s management.

Removal Provisions Need to be in the Governance Documents

The process of removing a bad business partner is often unpleasant and difficult, but it is likely unavoidable.  To prepare for this type of risk, diligent majority owners will want to include “removal rights” in the company’s governing documents (the LLC agreement, the partnership agreement, or corporate bylaws) that provide for the removal of business partners who go off the rails.  By the same token, minority investors will want to closely review all “bad boy” provisions to insist on changing these terms if they give the majority owner unbridled power that could be used abusively to harm the minority investor.
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By Ryan Bruderer and Ladd Hirsch

Recognized by Texas Bar Today’s Top 10 Blog Posts

Just as an excessively lavish desert can ruin a fine dinner, including an overly broad indemnity provision in a private company agreement can prove to be too much of a good thing for the company.  The point of indemnity provisions is to protect company executives (e.g., officers, directors, managers) from claims made against them in the good faith performance of their duties.  To ensure the net is broad enough to include all types of claims made against executives, however, these clauses are often drafted quite broadly.  But when the provisions are so inclusive they exceed their intended scope, another truism may apply—the cure may be worse than the disease.  This post discusses the effective use of indemnity provisions in private company governance documents and reviews potential drawbacks that can result when these provisions are drafted without appropriate limits.


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In the Harry Potter universe (now returned to playing on Broadway), the wizarding world greatly feared the Dark Lord, Voldemort.  In the business world, minority investors in private companies should rightly fear the power of majority owners who have the power to amend the company’s governance documents.  Minority investors in Texas privately-held companies often assume—understandably, but wrongly—that their equity stake cannot be taken for little value by the majority owner(s).  Minority investors further assume, naively, that if the majority owners suddenly changed the company’s rules to take minority investor’s stock or LLC units, the investor would have some sort of legal recourse and a strong claim to pursue against the majority owner.

But, the little-known and alarming reality is that, under Texas law, if minority investors are not careful to limit the “right of amendment” contained in the company’s governance documents, majority owners have the right to effectively pull the rug out from under minority investors.  Using this amendment power, majority owners may be able to change the company’s bylaws or revise the terms of the LLC company agreement to remove minority investors as managers, directors and employees, and just as importantly, deprive minority investors of the fair market value of their ownership interest in the business.
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