Push-pull provisions can be a constructive way to conclude a toxic business partnership while maintaining the viability of the business. There can however be cons to this arrangement, as illustrated in the following case study.
“A push-pull provision can be very good or extremely bad,” counsels Managing Shareholder Trey Hendershot. “If you’re the partner who wants to buy and you have the cash to fund a buyout – it’s good. But if you’re short on cash and can’t afford a buyout demand, it can be a bad mechanism. You may be forced to accept terms that are not in your best interests.”
How Does a Push-Pull Provision Work?
The objective of including a push-pull agreement in a partnership agreement is to preserve the business should a business partnership turn sour. Partner A can trigger the provision by offering terms and conditions for a buyout to partner B. These terms include a price per share and can also include conditions such as the signing of a noncompete agreement or a deadline to accept the offer.
Partner B can accept the terms and sell his share of the business, or – and here’s the catch – may invoke the push-pull and buy partner A’s shares on those terms instead.
“One party or the other is going to have to be bought out,” explains Hendershot. “Partner A sets the amount and terms, and partner B then determines who will buy by either accepting the offer to sell or making an offer to buy.”
The assumption is that partner A – not knowing which partner will be the buyer or the seller – will set fair terms or risk being forced to accept his or her own unfair terms. “It’s a great way of setting a fair market value for the buyout if you’re on a level playing field,” notes Hendershot. “Theoretically, the partner will look at numbers and try to set the sweet spot of what the company is really worth.”
Unfortunately, that is not always the case.
“If the two partners are not on a level playing field, i.e., if one partner is over leveraged or cash strapped,” Hendershot points out, “then one partner may set an unfair value with the intention of taking advantage of the other partner’s financial situation.”
Background of This Buy-Sell Agreement Dispute:
Our client and his partner formed a manufacturing company using a limited partnership. They were 50/50 owners of the business and included a buy-sell agreement with a push-pull mechanism in their partnership agreement.
After 15 years in business, our client's partner decided he wanted full control. This partner knew our client was short on funds and would not likely be able to afford a partner buyout offer. He set terms well below fair market value, assuming his partner would not be able to afford even the lowball offer and be forced to sell his own shares. Our client’s partner set a 30-day term to make the decision and included a noncompete agreement as a condition of the buyout.
Before the buyout offer was extended, our client's partner began speaking to employees, attempting to assess their loyalties – a breach of his fiduciary duty to the partnership. Business partners have a fiduciary duty, or a legal obligation, to act in the best interests of the partnership.
Our client retained Hendershot Cowart P.C. to represent him in the matter.
Our Strategy to End the Partnership Dispute:
Our client learned of the coup and shared that information with Hendershot who identified these activities as a breach of fiduciary duty.
“We immediately obtained an injunction to prohibit him from talking to anybody else at the business in violation of his fiduciary duties and in violation of the non-solicitation agreement contained within the partnership agreement,” says Hendershot.
Once the injunction was in place, our client’s partner admitted he was going to exercise the push-pull provision and made his demand.
Mr. Hendershot began working to help our client exercise his rights in the push-pull agreement, while assisting our client secure a line of credit that enabled him to buy out his partner.
Taken by surprise, the partner refused to close the sale, and Hendershot once again took legal action. He successfully petitioned the courts to impose an order to comply with the terms of the agreement, including signing a noncompete agreement, effectively limiting the partner from starting a competing business in the area for an established duration of time.
Because our client was able to obtain the funds to meet the terms of the push-pull agreement, he was able to buy out the partner and assume full control of the business, including patents and other trade secrets owned by the business that were the foundation of its success.
What are the lessons learned? “Know what your documents say. Know what your rights are, and understand that things can change between partners unexpectedly,” advises Hendershot. “Plan for the worst-case scenario and keep your options available.”
At Hendershot Cowart P.C., our experienced contract law and business litigation attorneys can help you protect your rights and fight for the best outcome in your case. To schedule a consultation with our team, contact us online or via phone at (713) 783-3110.