How a Partner Buyout Is Priced and Enforced in Texas

Three sources of a buyout price

Owners argue about buyouts as if there were a single right number. Texas law instead asks which rule applies, and the rule often decides the number.

1. The agreement. A buy-sell clause in the company agreement, partnership agreement or shareholders' agreement sets the trigger, the price method and the payment terms. Courts enforce these as contracts.
2. The statute, for general partnerships. When a partner withdraws from a Texas general partnership and the partnership continues, the Code redeems the interest at fair value.
3. Negotiation. For LLCs and corporations without a clause, the only buyout is the one the parties sign. The statute supplies no price and the courts will not order a sale.

When the agreement sets the price

Common clauses use book value, a multiple of earnings, a fixed price updated annually (often never updated), an appraisal by one or three appraisers, or a shotgun mechanism in which one owner names a price and the other chooses to buy or sell at it. Texas courts hold owners to these terms. An owner who agreed to book value years ago will usually get book value even when the company would sell for several times that, and a 'for cause' discount will be applied if the trigger and the definition of cause are met.

The disputes that do arise are about the clause's mechanics rather than its fairness: whether the triggering event occurred (was the termination really for cause), whether notices were sent on time, whether the appraiser followed the method the clause describes, whether 'book value' means GAAP or tax basis, and whether the departing owner can be made to sign a non-compete the clause did not mention. Those are contract questions, and a court reads the words. For how the valuation itself gets fought, see how valuation disputes between partners are decided.

The statutory buyout: withdrawn general partners

Texas general partnerships have a built-in exit that LLCs do not. A partner may withdraw at any time by giving notice of express will (section 152.501(b)(1)), and the partnership continues without him (section 152.502). If no event requiring winding up occurs within 60 days, section 152.601 says the withdrawn partner's interest is automatically redeemed by the partnership as of the withdrawal date. The rules that follow set the price and the process:

• Price. The redemption price is the fair value of the interest on the date of withdrawal (section 152.602(a)). The statute does not define fair value or prescribe a method, so appraisers and, if needed, the court decide what the interest was worth, and the parties argue over discounts and methods.
• Wrongful withdrawal. A partner who withdraws in breach of the agreement, or before the end of a fixed term or undertaking, gets the lesser of fair value or the liquidation value he would have received (section 152.602(b)), owes damages for the wrongful withdrawal, which the partnership may set off (sections 152.503, 152.604), and may have to wait for payment until the term ends unless a court finds no undue hardship (section 152.608).
• Interest. Interest accrues on the redemption price from the withdrawal date to payment (section 152.605).
• Timeline. If the parties do not agree on a price within 120 days after either side's written demand for payment, the partnership has 30 more days to pay its estimate of the price in cash or to demand what it says the partner owes it (section 152.607). On request, the payment must come with a statement of partnership property and liabilities, the latest balance sheet and income statement, and an explanation of the computation.
• Suing over the number. Either side may sue to have the court determine the redemption terms, but if the paying party gave the statutory notice, the suit must be filed within one year of the notice or the delivery of the financial information (sections 152.607(d), 152.609). The court fixes the price, interest and any setoff and enters judgment for the difference.
• Bad faith. If a party failed to tender payment or make an offer, failed to supply the required financial information, or acted arbitrarily, vexatiously or not in good faith, the court may assess damages including a share of the profits of the continuing business, attorney's fees, and appraiser and expert fees (section 152.609(e)).

Example

Suppose three CPAs practice as a Texas general partnership with no written agreement. One gives written notice that she is withdrawing. The firm continues. She demands payment; the firm offers a figure based on her capital account, roughly $90,000. Her appraiser values a one-third interest in the firm's earnings stream at $410,000. Under the statute her interest was redeemed on the withdrawal date at fair value, interest runs from that date, and if no deal is reached within 120 days of her demand the firm must pay its estimate within 30 days with the required financial statements. If the firm pays only the capital-account figure with the statutory notice, she has one year to sue for the balance, and if the firm never made a proper tender she can ask for her fees and expert costs.

LLCs and corporations: no statutory buyout

An LLC member may not withdraw (section 101.107), so there is no withdrawal to trigger a redemption, and the LLC chapter contains no fair-value redemption provision. A shareholder in a Texas corporation likewise has no general right to be bought out, and the Supreme Court of Texas held in Ritchie v. Rupe (Tex. 2014) that the receivership statute does not authorize courts to order a corporation or its other owners to buy a shareholder's interest. The buyout therefore has to be built by contract, before or after the dispute. A member can assign his economic rights to a buyer (section 101.108), but the assignee gets no vote and no membership without the other members' unanimous approval (section 101.109), which limits the outside market for a minority interest and is one reason minority LLC interests trade at a discount.

Making the buyout enforceable

A signed buyout agreement is a contract, and most of the later litigation is over terms the parties left out. Items that belong in every Texas buyout:

• Price, how it was derived, and whether it adjusts for post-closing discoveries (undisclosed liabilities, a lost major customer).
• Payment terms. A promissory note should carry security: a pledge of the purchased interest, a personal guaranty, or a lien on company assets where lenders allow it. An unsecured note from a company the seller no longer controls is a lawsuit waiting to happen.
• Representations by each side: that the financials provided were accurate, that the seller has not encumbered the interest, that no undisclosed claims exist.
• Mutual releases, carving out the note and the covenants that survive.
• Restrictive covenants. A non-compete in a buyout is enforceable in Texas if it is ancillary to an otherwise enforceable agreement and reasonable in time, geography and scope (Business and Commerce Code section 15.50); a court reforms an overbroad one rather than voiding it (section 15.51). Covenants given by a seller of an interest are reviewed more favorably than those imposed on employees.
• Transition: resignations, bank and system access, customer notices, tax elections and who signs the final returns.

If the buyer defaults, the seller sues on the note and forecloses on the collateral. If the seller later competes or disparages, the buyer enforces the covenants. The agreement is only as good as the remedies it gives the party who kept its side.

Who is on the other side of your buyout

Buyouts between owners are negotiated by people who know each other's weak points. A litigator's role is to turn the law above into a specific position: what the agreement actually requires, what the statute would pay a withdrawn partner, what a winding up would leave each side, and what the other owner's exposure on fiduciary or records claims is worth. Tina Wysk represents owners on both sides of partnership and shareholder buyouts in Dallas. For the broader practice see shareholder and partnership disputes; for the decision to leave at all, see whether one partner can dissolve the company.