For decades, Texas business owners have relied on the assumption that if the contract allows it, the courts will enforce it. However, a recent and significant ruling from the Texas Business Court has added nuance to this rule. The court recently weighed in on a dispute involving drag-along rights and whether those rights can be used to bypass fundamental duties of loyalty and care.
This decision is a major milestone for the Texas legal landscape. As we navigate these evolving standards, our business lawyers at MehaffyWeber are closely monitoring how the court’s interpretation will affect corporate governance, mergers, and acquisitions across the state. This ruling sends a clear message: while Texas remains a freedom-of-contract state, you cannot simply contract your way out of basic statutory fairness when a conflict of interest arises.
Drag-Along Rights Meet Fiduciary Duties
Drag-along rights are a common feature in shareholder agreements and LLC operating agreements. Essentially, they allow a majority shareholder to force the minority shareholders to join in the sale of a company. If the big players find a buyer, they can drag the little players along into the deal on the same terms. This prevents a small minority owner from holding a multi-million-dollar deal hostage. Fiduciary duties, especially loyalty and care, are the golden rules of business management.
- The duty of loyalty requires those in control of the business to put the company’s interests ahead of their own.
- The duty of care requires them to act with the diligence and prudence that a reasonable person would use in a similar position.
In the past, many deal-makers assumed that if a contract gave a majority owner the right to drag everyone else into a sale, that right was absolute. They thought that if the contract was followed, the minority owners could not complain. This new court decision, known as the Primexx decision, says that it is not necessarily true.
What Happened in the Primexx Case?
The case centered on the sale of Primexx Energy Partners. In this scenario, the majority owners decided to sell the company to Callon Petroleum. To make the deal happen, they invoked their drag-along rights, forcing the minority owners to sell their stakes as well.
The minority owners were not happy. They argued that the majority owners, who stood to benefit in ways the minority did not, had structured the deal to favor themselves. They claimed that even though the contract allowed for a drag-along sale, the people in charge still had a legal obligation to ensure the deal was fair and that they were not just lining their own pockets at the expense of the other shareholders.
The majority owners’ defense was straightforward. They said the agreement allows them to do this and that it limits or eliminates their fiduciary duties. They said that, therefore, the minority owners have no ground to stand on.
Why the Court Said Not So Fast
The Texas Business Court looked past the contract and focused on the Texas Business Organizations Code (TBOC). The court’s conclusion was a wake-up call for many. Statutory duties of loyalty and care cannot be entirely eliminated when drag-along rights are invoked, especially in the face of self-dealing. The court’s logic followed a few key points:
- While Texas law allows LLCs and partnerships to limit some liabilities, the TBOC sets certain boundaries that cannot be fully waived. You cannot just delete the law because you wrote a contract.
- Even when a partnership agreement gives majority owners significant discretion, those owners must still act honestly and in a manner they reasonably believe benefits the partnership as a whole.
- The court took a statute-first approach. Instead of relying on common law, the court focused on the TBOC’s statutory language as the starting point for analysis. This provides greater predictability for businesses, but it also means you must follow the state’s rules.
This reinforces a broader theme in Texas business law. Contractual freedom is respected, but it does not override fundamental statutory protections.
Why This Decision Matters for Texas Business Owners
The Primexx ruling carries heavy implications for any business that relies on investor capital or has multiple tiers of owners.
Contractual Freedom Has Guardrails
Texas is a business-friendly state because it allows parties to structure agreements with considerable flexibility. However, this ruling confirms that statutory duties serve as a backstop against conduct that undermines fundamental fairness. You can narrow your duties, but you cannot erase them entirely.
Documentation is Critical
When majority owners decide to force a sale, they must show their work. Because the court will still look at whether the duty of care was met, it is vital to ensure the transaction process demonstrates transparency and reasonable business judgment. If it looks like a backroom deal, the drag-along clause will not protect you from a lawsuit.
Speed of the Business Court
One of the most interesting aspects of this case was how fast it moved. The Texas Business Court issued significant rulings within just a few months of the case being filed. For business owners, this is good news. It means complex disputes may be resolved more quickly, giving businesses greater predictability when major deals are challenged.
Practical Tips for Drafting Your Agreements
If you are currently drafting or reviewing a partnership or operating agreement, the Primexx decision offers some homework. Our business lawyers recommend focusing on these practical areas:
- Define conduct standards: Instead of waiving all duties, identify specific categories of conduct that the partners agree do not violate the duty of loyalty.
- Clear sale procedures: Your drag-along provisions should include a clear, step-by-step procedure for how a sale is approved and documented.
- Disclosure obligations: Clearly specify which information must be shared with minority owners during a sale.
- Independent valuations: If a majority owner is getting a specific benefit from a deal, consider getting an independent third party to value the company.
Because disputes often arise years after agreements are signed, thoughtful drafting at the outset can help prevent costly litigation later.
The Big Picture
The Primexx decision does not eliminate drag-along rights. They are still a vital and legal part of doing business in Texas. What the decision does is remind us that power must be exercised in good faith. If you are a majority owner, you cannot use a contract as a shield to hide bad-faith conduct. If you are a minority owner, you have more protection than you might have thought.
The landscape of Texas corporate law is changing as the Business Court begins to flex its muscles. Understanding how these judges interpret fiduciary duties in complex deals is essential to protecting your investments. Whether you are a founder, private equity investor, or minority partner, now is the time to ensure your governing documents are aligned with these new statutory requirements.