Unintentional Partnership in Texas

Question: Can two or more persons create a partnership even though they did not intend to do so?

Answer: Yes, under certain circumstances.

   Generally, under Texas law an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether (1) the persons intend to create a partnership, or (2) the association is called a “partnership”, “joint venture”, or other name.  Partnerships are governed by Chapter 152 of the Texas Business Organizations Code.

   What this means is that two or more people could in fact cause the creation of a partnership even though they did not intend on doing so.  The consequences of being partners is the fiduciary duty which arises between partners. The Texas Business Organizations Code also sets forth factors indicating that persons have created a partnership. These factors include:

(1) Receipt or right to receive a share of profits of the business;

(2) Expression of an intent to be partners in the business;

(3) Participation or right to participate in control of the business;

(4) Agreement to share or sharing:

       (A) losses of the business; or

       (B) liability for claims by third parties against the business; and

(5) Agreement to contribute or contributing money or property to the business.

Interestingly, an agreement by the owners of a business to share losses is not necessary to create a partnership.

   On January 31, 2020, the Texas Supreme Court held that parties can conclusively negate the formation of a partnership under Chapter 152 of the Texas Business Organizations Code through contractual conditions precedent. The condition precedent was that the “venture” would not come into effect until the respective parties’ board of directors approved the deal.  The boards of the companies never approved the venture and thus that one provision saved one of the parties almost half a billion dollars:

Texas Supreme Court upholds Court of Appeals reversal of FIVE-HUNDRED-MILLION-DOLLAR trial court verdict. In Energy Transfer v. Enterprise, the high court dealt with a clause that contained conditions precedent to forming a partnership. Enterprise and Energy Transfer, two of the top ten largest energy companies in the United States, sought to re-purpose an existing pipeline or build a new one to transfer crude oil south as opposed to north. The two companies expressly rejected creating a partnership until two conditions precedent were met: 1) execution of definitive agreements memorializing the terms and conditions of the pipeline transaction that 2) received approval from each party’s board of directors. Subsequently, when the companies failed to get shipping commitments to cover the potential costs of the pipeline, Enterprise ended talks with Energy Transfer. Enterprise would eventually go into business with ConocoPhillips. Energy Transfer, believing Enterprise and Energy Transfer entered into a partnership agreement, sued Enterprise claiming breach of fiduciary duty. (Fiduciary duty is putting the wellbeing and interest of the person for whom they are responsible above their individual interests; the duty commands exceptional loyalty of the party owing a fiduciary duty.) The trial court awarded Energy Transfer damages totaling $535,794,777.40. Enterprise appealed, and the Court of Appeals reversed the trial court’s ruling and found for Enterprise. As a result, Energy Transfer filed for review with the Texas Supreme Court. Enterprise continued to argue no fiduciary duty existed because no partnership was entered into between the parties. The Texas Supreme Court agreed. The Court, applying long-standing freedom to contract law, held that parties could require conditions precedent to the formation of a partnership notwithstanding the Texas Business Organizations Code’s five factor partnership test.

   It is the general rule that when an agreement provides a condition precedent to the formation of a partnership, it will not come into existence until the condition has been met. However, such condition precedent may be waived and, if the parties actually proceed with the business, they may be held as partners even though the condition precedent has not been satisfied.

   Chapter 152 is not the sole source of rules for determining partnership formation. The determination of formation of a partnership should “include” the five factors listed in the section. Those factors are not exclusive. Principles of law and equity supplement the statutory partnership provisions unless otherwise provided by this chapter or the other partnership provisions.

What should persons do when looking into a business venture?

   First, the parties should enter into a written agreement, which can be informal, clearly stating that the parties are contemplating a business venture, or exploring the feasibility of a business venture; and that despite negotiations with third parties, expenditures of funds towards investigating the venture, reimbursement or sharing of expenses between the parties, no partnership shall be created “unless …….” (clearly and specifically stated).

   That “unless” is the condition precedent.  The condition can be approval of a formal agreement by the board of directors of corporations, by the manager or managers of an LLC, or the signed agreement for the formation of a partnership.  The condition could be the enactment of a trade agreement with another country, or even a minimum price making up the subject matter of the venture, such as the price per bushel of corn must be “$$$” before any business venture shall be formed, or as simple as requiring the respective wives of the parties to approve the venture in writing.

   Make sure oral agreements are disclaimed and a provision that the parties disclaim any reliance upon any representation made by, or information supplied by, the other party, and waives any claims for fraudulent inducement.

Should you need help understanding the laws surrounding General Partnerships, please contact one of our Murray-Lobb Attorneys.

All Stock Purchase Agreements Must Include Key Provisions

Every stock transfer is important, regardless of its size. Therefore, your corporation must draw up a comprehensive stock purchase agreement to govern all such transactions. If you fail to do so, shares of stock could easily wind up in the hands of company outsiders whose interests are at odds with those of most shareholders.

Corporations usually choose to prevent this type of problem by including a “right of first refusal” in their written agreements so that their shareholders’ interests remain fully protected. As the term implies, the corporation itself (or one of its current shareholders) will always have the right to try and purchase all shares being sold before an outsider can try to buy them. This is just one of the many basic provisions your Houston corporate law attorney will address when drafting a stock purchase agreement for you.

The following information covers some of the other basic provisions that should normally be included to fully protect your most important corporate interests during sales of stock.

Added Legal Protections Offered by Professional Stock Purchase Agreements 

Even when a buyer and seller know each other well, it’s always best to capture all the terms governing their sales transactions in writing. In addition to describing different warranties, your lawyer may suggest that you also cover some of the topics set forth below in your stock purchase agreement.

  • Details about the parties and the specific stock being sold. For example, you’ll need to state the names of the seller and buyer, the number of shares being sold, and the current dollar value of each share of common stock. The date of the transaction should also be noted, along with a statement that the seller is conveying all ownership of the endorsed stock certificates to the buyer. It’s also customary to note that the seller will pay all applicable taxes on the sale;
  • Proper warranties and representations should be included. It’s important to state (1) that the corporation is legally entitled at the time of the sale to transfer ownership of the stock and that the corporation itself is in good standing with all governing agencies; (2) that the seller is currently the valid owner of the stock and has the right to fully convey all rights in the shares to the seller; (3) that all federal, state and local laws and guidelines intended to govern such transactions are being followed; and (4) that all critical facts have been disclosed regarding the transaction;
  • In some cases, you may want to state that the buyer will pay in two installments. When this happens, a percentage of the purchase price is paid upon both parties signing the stock purchase agreement. On a second date set forth in the agreement, the remainder of the purchase price is paid for the shares (when the contract is fully executed). It’s always preferable to have at least one witness sign the agreement in case either party later tries to challenge the entire transaction in court;
  • Clear definitions should be provided in the opening paragraphs of the agreement. These should always include a description of how the corporation currently pays stock dividends to shareholders. A paragraph should also clearly indicate which dispute resolution or mediation groups may be consulted if any problems arise later concerning the sale of the shares;
  • A specific statement as to whether this sale is governed by the SEC (Securities and Exchange Commission). Depending on the type of corporation you’re running, it may be necessary for your attorney to file paperwork regarding the sale with the SEC.

While the list above isn’t intended to be comprehensive, it should provide you with a clear idea of the many critical topics that most stock purchase agreements should cover. It’s always best to have your lawyer go over your corporation’s specific needs with you before drafting this type of document since federal, state and local laws are constantly changing.

Members of our firm are readily available to provide you with professional legal advice concerning all your corporate needs and interests. We look forward to meeting with you soon.

Shareholder Agreements Require Flexible Buy-Sell Provisions

There are many reasons why shareholders in closely-held corporations may need to quickly sell their shares to others. Therefore, it’s important when drafting a shareholder’s agreement to cover every basic aspect of buying and selling shares – in addition to the general administrative matters that must normally be addressed.

Depending on a corporation’s number of major shareholders and business pursuits, a flexible framework helps facilitate every goal. The following list sets forth some of the main terms that shareholder agreements should cover, separate and apart from the buy-sell provisions that will be discussed in greater detail below.

Common Administrative Topics Set Forth in Many Shareholder Agreements

  • Voting rights. Always describe each shareholder’s voting rights and when they can be properly exercised;
  • Qualifications for serving as corporate officers. Basic requirements must be stated so that only fully qualified individuals can serve as corporate officers at any level;
  • Noncompete provisions. All parties involved with a corporation must agree to avoid compromising its trade secrets or later leaving and then trying to compete for its clients for a limited time;
  • Preferred groups to consult with when internal disputes must be resolved. Include the names of specific mediation or dispute resolution services that can be contacted and how the corporation should decide when such outside help is required;
  • Inclusion of anti-dilution provisions to protect stock values;
  • A description of major shareholders’ “tag-along” rights;
  • Registration rights must be explained and how they apply to certain restricted stocks;
  • Stock valuation procedures must be described and closely followed.

Once these and other crucial topics have been covered, you and your Houston corporate law attorney should discuss the best buy-sell provisions suited to your corporate structure.

Basic Buy-Sell Provisions – Events That Often Trigger Their Use

Your shareholder’s agreement should always include a very detailed explanation of how shares should be sold when one of the following events takes place.

  • The death of a shareholder;
  • The termination of an employee shareholder – whether “for cause” or without cause;
  • The disability of a shareholder;
  • A shareholder’s retirement

When trying to draft the best buy-sell procedures to address these situations, it’s often wise to sit down and review your corporation’s main concerns and interests with your lawyer.

Should the Selling of Shares Be Mandatory — or Provide Parties with Greater Choice?

When trying to answer this question, you may want to provide different answers, depending on whether the sales are to the corporation itself, other shareholders – or to third parties.

  1. Should your corporation be given the first right to purchase (or redeem) the stocks? If you and the controlling officers of your corporation wish to include this provision in your shareholder agreement, be sure to first consider the possible capital gains tax issues involved;
  2. Do you want to automatically offer the available shares to other general shareholders if the corporation isn’t interested in redeeming the shares after a set deadline? If so, it’s important to indicate if majority shareholders will have the first opportunity to buy the shares;
  3. Are you willing to allow outside third parties to buy the newly available shares? If so, you must decide in advance the types of criteria that such buyers must meet.

Other Key Issues Involved with Drafting Your Buy-Sell Provisions

  1. Setting the proper price to be paid for the stocks. In general, if the available shares are to be purchased by the corporation or one of its current shareholders, you should have already created a clear formula in your shareholder’s agreement for determining the current, proper valuation of the stock. However, if the shares are to be sold to an outside third party, that outsider’s offer will normally be determined by the current market price for the type of shares involved;
  2. How should the price be paid? Most corporations will benefit from establishing a basic buyout procedure within its shareholder agreement so that these common transactions can be handled according in a very clear, pre-determined manner. Since lump-sum payments are usually not preferred, you will need to decide if you prefer such options as:
  1. A buyer-financed buyout
  2. A seller-financed buyout, or
  3. Some type of financing arrangement involving insurance or a trust

Since a corporation’s success is often determined by the terms and quality of its shareholder’s agreement, please feel free to contact our firm so we can provide you with our general legal advice or help you draft a new agreement.