START UP WEEK: Withdrawal, Financing, and Acquisition
Unfortunately not all businesses work out and must come to an end, or there is some even that requires the business to terminate. How this occurs and how the business owner should handle it depend on whether it is a partnership (including limited partnerships and LLCs) or whether it is a corporation. On the other end of the spectrum, a business may become so successful that it is in a position to receive substantial financing (venture capital or private equity) or even outright acquisition. This post will discuss some issues presented in each of these circumstances.
Partnerships and LLCs: Withdrawal and Winding Up
Certain events can bring about the withdrawal from a partnership under the Texas Business Organization Code (TBOC). The most common are voluntary withdrawal, expulsion, the partner dies or ceases to exist, the partner enters into bankruptcy. The partner's withdrawal must abide by the operating agreement to avoid breach. If the partnership will continue after withdrawal, the exiting partner has a right to have his interest redeemed for the fair value on the date of withdrawal plus interest. The partnership and withdrawing partner must come to an agreement on the redemption price. If no agreement can be reached within 120 days after written demand for redemption. The partnership must pay the withdrawn partner within 30 days its estimate of the redemption price.
One issue to be aware of is the withdrawing partner's ability to bind the partnership. For one year after withdrawal, a partner can bind the partnership to any agreement that would have bound the partnership before withdrawal if there was apparent authority to enter into the agreement, and the third party did not have notice of the withdrawal and reasonably believed that withdrawn partner was still a partner. Additionally, the withdrawn partner remains liable for any partnership obligations that were in existence before withdrawal.
When the partnership decides or is forced to "wind up" its operations, certain requirements under the TBOC must be followed. A solvent business that is dissolved with liquidated assets must pay cash first to creditors and then to the partners' capital accounts. Where a partner pays more than his share of the debt, he is entitled to a contribution from the others for that amount.
Financing and Acquisition
Hopefully your company will be in a position for funding or even acquisition. The following are some of the agreements you will encounter and some issues relating to each.
- Letter of Intent/Term Sheet -- LOI's and Term Sheets set out the ground rules for the negotiation and try to get the major issues of the agreement in writing. Neither of these are legally binding (unless there are confidentiality provisions), but merely provide a roadmap and framework for the deal.
- Stock Purchase Agreement -- you will need an SPA to allow for the investor or acquiring entity to purchase equity in your company.
- Certificate of Incorporation/Investor Rights Agreement/Voting Agreement-- an amended certificate of incorporation is generally needed to set out the new voting rights and requirements/obligations for the new investors.The other agreements will further set out the rights of investors and how voting will work following the agreement.
- Right of First Refusal -- the company will often want to have a right to repurchase the stock should the new investors choose to sell it at a later date.
- Indemnification Agreement -- Indemnification agreements are often major sticking points in M&A's. At what point should the new investor/acquiring entity pay liabilities before the company becomes responsible? This is often related to the earnout provision and the projected revenue of the company.
