Business Divorce

Does Texas law provide a right to withdraw an owner’s investment from a business entity?

In Texas, only partners in a general partnership have a default right to withdraw the value of their investment from a business entity. However, Texas law allows for these provisions to be liberally modified by contract. Typically, limited partners, members in LLCs, and shareholders in close company are limited in their ability to convert their business interests into liquidity. This is one reason why negotiating for protective rights before investing into a business or entering as a partner is so important.

What are the potential ways in which I can successfully obtain a business divorce?

One or several owners may have cause to bring an action for winding up and termination of business, and the “divorce” can occur pursuant to a court order. Also, business owners can agree to negotiated dissolutions of their business entity and its assets in any way that they find agreeable, including by separating lines of business or assets, or by buyouts or joint sales of the business.

In what circumstances can I seek dissolution of an entity in which I am an owner?

Under Section 11.314 of the Texas Business Organizations Code, if the entity is a Texas partnership or limited liability company, on application by an owner a district judge may order winding up and termination of a partnership if:

  1. The economic purpose of the entity is likely to be unreasonably frustrated;
  2. Another owner has engaged in conduct relating to the entity’s business that makes it not reasonably practicable to carry on the business with that owner; or
  3. It is not reasonably practicable to carry on the entity’s business in conformity with its governing documents.

This statute could apply to several situations, including ones in which owners of equal stakes in a business cannot agree on a future course of conduct or plan for the business.

What are my rights as an owner or member of a Texas entity to seek appointment of a receiver to control or liquidate an entity?

First, a court may appoint a rehabilitative receiver under Section 11.404 of the Texas Business Organizations Code, upon compliance with other requirements and, only if:

  1. the entity is insolvent or in imminent danger of insolvency;
  2. the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or members of the entity are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of the deadlock;
  3. the actions of the governing persons of the entity are illegal, oppressive, or fraudulent;
  4. the property of the entity is being misapplied or wasted; or
  5. with respect to a for-profit corporation, the shareholders of the entity are deadlocked in voting power and have failed, for a period of at least two years, to elect successors to the governing persons of the entity whose terms have expired or would have expired on the election and qualification of their successors;

Under Section 11.405 of the Texas Business Organizations Code, a partial owner of a business may seek liquidation only if the entity is in receivership and that the court des not find that any plan to rehabilitate the entity is feasible before the first anniversary of the receiver’s appointment. Further a court may only do so if all other legal and equitable remedies are inadequate and the circumstances demand liquidation to avoid damages to interested persons.