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People typically enter into business partnerships with the best of intentions. But when things go awry down the road, the minority partner may claim that the majority owner violated a fiduciary duty by failing to act in the best interests of the business or by acting so recklessly that it amounts to gross negligence. Before things go off the rails and the lawyers start firing off nasty letters, it is helpful to develop a basic understanding of the fiduciary duties that apply to those who control the company — officers, directors, managers and general partners. This post focuses on these fundamental questions: What are fiduciary duties and what conduct do they require? 

The First Question: Was There a Duty?

For a disgruntled minority partner, the first step is to determine whether the person who may be the subject of a claim owes a fiduciary duty to the company or its owners. Certain roles are usually subject to fiduciary responsibilities under Texas law — such as business partners, corporate officers and directors, or managers of an LLC — and these individuals are expected to act with loyalty, honesty, and care toward the business and, in some cases, its owners. But, as discussed below, the company’s governance documents may limit, or in some cases, eliminate the fiduciary duties of company officials or remove their monetary liability. As a result, it is critical to check the bylaws (corporations), the company agreement or regulations (LLCs), or partnership agreement (limited partnerships) to determine what limits they may impose on fiduciary duties.

Things can also get murkier in closely held businesses, especially those involving friends or family as co-owners. Many people assume the existence of long-standing personal relationships will impose fiduciary duties on one or both of the parties. In Texas, that’s usually not the case. Parents, siblings and close friends do not automatically become fiduciaries just because they trust each other. Courts typically require specific evidence of a deeper, pre-existing relationship of trust that existed before the business arrangement — not just trust that developed as part of it. That distinction often comes as a surprise, especially in family business disputes.

It is important to understand, as well, that defendants in a fiduciary duty case will ultimately bear the burden of proof if it is established that they owe a fiduciary duty. The average person typically assumes that the plaintiff always bears the burden of proof, but that is not always the case in fiduciary litigation.

Check the Fine Print

In May 2025, the Texas Legislature amended the Business Organizations Code to allow LLCs and limited partnerships to eliminate the duties of loyalty, care and good faith for managers, officers and general partners(seeTBOC Section 101.401). In addition, while corporations cannot eliminate the duties of loyalty and good faith, TBOC Section 21.418(f) provides that officers and directors are not liable for engaging in interested transactions unless it is established that they engaged in fraud, intentional misconduct or knowing violations of law. In addition, corporations can stipulate in their governance documents that their officers and directors are not liable to the company or its owners for monetary damages resulting from their acts or omissions.

Thus, the company’s governance documents may significantly shape the fiduciary duties that would otherwise apply and include provisions that:

  • Limit liability for certain decisions
  • Allow conflicts of interest if properly disclosed and approved
  • Replace traditional fiduciary duties with contract-based standards

In some LLCs, for example, managers may have reduced duties so long as they act in good faith and follow the agreement. And corporate directors and officers are often protected from liability for simple negligence, though not for conduct amounting to fraud or self-dealing.

The bottom line is that an initial review of the company’s governing documents is critical as it may often determine whether a claim is viable — or not.

Not All Bad Decisions Constitute Breaches of Fiduciary Duty

It is also important to understand that not every poor business decision amounts to a breach of fiduciary duty. Business leaders are generally protected by what’s known as the business judgment rule. This means courts won’t second-guess decisions that were made in good faith, with reasonable care, and in what the decision-maker believed was the company’s best interest — even if those decisions ultimately turned out badly. Problems arise, however, when someone:

  • Puts their personal interests ahead of the business
  • Uses company assets for personal gain
  • Hides important information
  • Engages in unfair or self-interested transactions

The business judgment rule that applies to these claims was codified in the same amendments to the TBOC that the legislature passed in May 2025 (see TBOC 21.419). The new form of rule applies to Texas corporations that are publicly traded and to corporations and LLCs that opt into this new section in their certificates of formation, bylaws, or company agreements.

The statute presumes that officers, directors and managers acted (i) in good faith, (ii) on an informed basis, (iii) to further the corporation’s interests, and (iv) in compliance with applicable law and the corporation’s governing documents. The plaintiff bringing the claim has the burden to rebut these presumptions and must also plead with particularity that the alleged breach constitutes fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.

Who Owns the Claim — the Minority Owner or the Company?

One of the most confusing aspects of fiduciary duty cases is determining who has the right to bring the claim. In many cases, the harm at issue is suffered by the company — when company funds are diverted or its assets are wasted or misused. Those claims for injury to the company typically belong to the company, not to the individual owners. Therefore, to pursue this type of claim, the minority owner will need to bring a derivative claim on behalf of (in the name of) the business. On the other hand, if the individual owner was personally harmed — such as losing voting rights or if the owner’s interest was unfairly diluted — the owner may have a direct claim.

This distinction isn’t just technical. Filing the wrong type of claim can result in dismissal of the case. There are a variety of procedural rules the minority owner will be required to follow to bring a derivative claim, but there are two types of derivative paths in Texas depending on the size of the company. The first type has a host of procedural/statutory requirements, including providing the company with formal written notice and an opportunity to respond within 90 days before filling suit (seeTBOC 21.553). The second category of derivative claims exists when closely held companies are involved (i.e., companies that are not publicly traded and have less than 35 shareholders), and in those instances, the procedural rules are relaxed and no notice is required before a minority owner may bring a direct action in the name of the company(see TBOC 21.563). The rules for recovering damages to the company can also be different in closely held entities.    

Evidence Can Make or Break the Case

Fiduciary duty disputes are rarely decided based on who tells the better story. They’re usually decided based on documents and, in many cases, on the testimony and analysis of financial or valuation experts. Financial records, emails, text messages, contracts, and internal communications often provide the clearest picture of what actually happened to cause a dispute. In many cases, early access to these materials can quickly reveal whether a claim is strong or whether it’s likely to fall apart under scrutiny. One of the first things to consider is what evidence exists to support the claim and how readily it can be obtained. Gathering this evidence before the first meeting with an attorney is advisable.

What Recovery Is Permitted?

If a fiduciary duty was breached, the law offers several potential remedies, but remember that under the amendments to TBOC, the standard of proof has been heightened. The plaintiff is going to have to establish that the governance person engaged in fraud, intentional misconduct or knowing violations of law in order to recover. As noted above, however, this is where burden shifting rules get tricky. If that hurdle can be met, however, the minority owner may be able to recover financial losses, such as lost profits or diminished business value, and in some cases, courts can require the wrongdoer to return profits they gained from their misconduct — even if the plaintiff cannot prove traditional (actual) damages suffered.

When fraud or intentional wrongdoing is established, additional damages and legal or equitable remedies may be available, including temporary and permanent injunctive relief and the imposition of a receivership or constructive trust. Courts can also step in to unwind improper transactions or impose other remedies to protect the business.

Conclusion — Making the Right Call Early

Fiduciary duty cases are complex because they sit at the intersection of business relationships, legal obligations of the parties, and written agreements, and therefore, the minority owner may be able to assert claims for breach of contract, as well as claims for breach of fiduciary duties, or sometimes only breach of contract. At their core, these cases revolve around a few key questions:

  • Did the defendant owe a fiduciary duty?
  • Was that duty limited by some agreement?
  • Was the duty actually breached?
  • Who was harmed by the breach and how?
  • Is there enough evidence to prove the breach?
  • Is emergency relief necessary?
  • Is the heavy cost worth the requested relief?

Answering those questions early — and objectively — can save significant time, expense, and frustration down the road.

In sum, when a minority owner has a potential claim for breach of trust against a business partner, it requires a realistic evaluation of the claim, the evidence and the desired relief. This analysis is necessary as the first step to decide whether to pursue the claim, negotiate a resolution, or take a different path forward. Similarly, if a majority owner is faced with this type of allegation, an objective evaluation of the law, the evidence supporting the claim and damages sought is essential to assess whether to gear up to battle the claim head on or seek an early resolution.

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Majority owners and minority investors act wisely when they negotiate and adopt a buy-sell agreement (BSA) at the time the private company investment is made because the BSA helps to avoid future conflicts between them. Signing a BSA, however, and deciding when to trigger it to require the purchase/sale of the minority interest are different things. The question remains after signing the BSA: When is the right time for partners to say goodbye?

This post focuses on that “trigger decision” and reviews key factors for partners to consider based on their business goals, the nature of their relationship and the company’s status. When a potential exit arises, each partner needs to decide whether to exercise the BSA or to keep the powder dry to trigger it at a better time in the future.

The Look-Back Provision

Before the partners exercise the BSA, an important point needs to be made about a key provision relating to the timing of the redemption of the investor’s minority ownership interest. When a majority owner has the right to trigger a BSA, the owner can decide to redeem the minoirty interest before a sale of the business to a third party. That could result in a situation where the minority investor’s interest is redeemed, and a short time later, the business is sold at a much higher value than the investor received.

To address this situation, in addition to securing a BSA, the investor will also want to obtain a look-back provision in the bylaws, the LLC company agreement, or in a separate shareholder or members agreement. This provision protects the minority investor if there is a sale of the business or an investment in the business that takes place shortly after the investor’s interest is redeemed. The length of the look-back provision is negotiable, but it is often in place for at least a year. This provision then comes into play when the business is sold within a year at a higher value or there is another investment made in the company at a value higher than the investor received. At that point, the investor will receive a true-up payment to equate to the higher value that is established in the later transaction. 

Majority Owner: When to Trigger a Redemption

Once the majority owner obtains an investment from a minority partner, the owner can continue using the investor’s capital to grow the business without ever exercising the right to redeem the investor’s ownership interest. But for the business reasons discussed below, the majority owner may decide to trigger the BSA and acquire the interest in the company that is held by the minority partner.

First, if the majority owner believes the minority partner has become disruptive to the business, the owner may trigger the BSA’s call right and redeem the minority investor’s interest. A thoughtful owner will appreciate that differences in views held by other partners are healthy because the opportunity to consider alternative approaches helps prevent the business from becoming stagnant. But an investor who consistently opposes or interferes with the majority owner’s vision for the business may negatively impact the culture and detract from the company’s success. When the investor’s opposition reaches a point of dysfunction, the majority owner can trigger the BSA and redeem the minority interest.

Another scenario warranting a redemption of the minority interest can arise when the majority owner has a sizable number of investors who all hold small ownership stakes in the business. The owner may want to redeem those interests in a rollup transaction. This is often the case when the majority owner identifies a single investor who has experience and helpful connections in the industry, and who can replace the capital investment held by a group of smaller investors.

One additional instance in which the majority owner may decide to trigger the BSA results from long-term planning when the owner becomes concerned that a minority investor may disrupt a future sale of the business. This type of minority partner regularly attempts to assume a more active role in the business than the majority owner prefers. The owner may tolerate intrusive conduct from a minority partner for a time, but if the minority partner is present when a sale process begins, it could derail the sale. Engaging in forward thinking, the majority owner may trigger the BSA, buy the minority partner’s interest, and streamline the company for a potential sale years before embarking on an effort to sell the business.

Minority Investor: When to Trigger a Sale of the Ownership Interest

When the business is thriving, the minority investor will likely be content to hold on and watch the value of the investment appreciate. There are several situations, however, that may make it advisable for the investor to consider triggering the BSA to require a sale of the minority interest, which are reviewed below.

First, after years of growth in the business, the investor may trigger the BSA as part of the investor’s asset allocation strategy. More simply stated, the investor may decide to diversify its holdings due to the increase in the total value of the investment, i.e., to avoid having too many eggs in the same basket. Most BSAs require an all or nothing approach and when the BSA is triggered, the investor’s entire holding in the business must be sold at that point. If the relationship between the partners is strong, however, the majority owner may agree voluntarily to allow the minority partner to conduct a partial sale of its interest, which permits the investor to take some chips off the table. 

Second, there are various red flags that may lead the investor to trigger the BSA that arise when the investor loses confidence in the majority owner and/or in the management or the business. This can take place when the company’s management changes over time, when management makes decisions that change the company’s fundamental direction, expose the company to new risks or fail to respond to challenges in a way that inspires confidence. When these things happen, the investor can make the decision to prevent future loss and require a sale of the minority interest before things go further south.     

Third, even when management is executing well, the savvy investor may decide that the market conditions that apply to the company’s industry or to the market make it a good time to exit from the investment. The investor may have already enjoyed a favorable return on its investment in the company before exercising the BSA. This is another example where the investor’s monitoring of its investment leads to a business decision to exercise the BSA and lock in the gain the investor has already secured from its investment.

Conclusion

Saying goodbye to a business partner is not an easy decision, but having a BSA in place provides majority owners and minority investors with the option to decide when the time is optimal for them to redeem or sell the minority interest in the business. When the majority owner has a BSA available, the owner is not “stuck” and has the flexibility to decide to replace the investor with a different business partner. On the other side, a minority investor who has become disenchanted with the majority owner or the management of the business can monetize its investment by triggering the BSA. 

As part of entering into a BSA, the minority investor will also want to make sure to secure a look-back provision when the BSA is adopted. This provision prevents the majority owner from redeeming the investor’s minority interest for a below-market price and then promptly selling the business a short time later in another transaction for a much higher value than the investor received at the time of the redemption.

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Private company buyers and sellers are more frequently using earnout provisions to help close the gap when they disagree over the price to be paid for the purchase/sale of the company. This creative solution can lead to conflicts, however, when the purchaser later contends that the earnout target was not met and, therefore, that no further amount is owed to the seller. In light of how commonplace litigation has become over the interpretation of earnout provisions in purchase agreements, this post offers practical guidance for buyers and sellers as they negotiate earnout terms that are designed to minimize post-sale disputes.

Earnout Provisions Can Help Achieve Purchase Transactions

Earnout provisions generally call for the buyer to pay most of the purchase price at closing, but also to agree to pay a potential additional amount on a contingent basis to the seller. The buyer is only required to pay this contingent amount to the seller if the business that is acquired achieves specific performance targets during a defined period after closing. For sellers, the earnout provides them with the opportunity to secure a much higher sale price following closing and usually after a transition period of one to two years. For buyers, earnouts lower the amount of cash they need to pay up front to the seller, and they also keep some risk in acquiring the new business on the seller, who may have to assist the business in performing well during the earnout period in order to secure the contingent payment.

Earnouts have become increasingly common, particularly in private non-life-science deals. According to the American Bar Association’s Private Target Mergers & Acquisitions Deal Points Study in 2023, the use of earnouts hit a new high that year. Many earnouts last for 24 months, although shorter or longer periods are not uncommon. Due to the increase in the use of earnout provisions in 2023, we have seen a large number of earnout disputes surfacing in recent years. Specifically, buyers and sellers are having conflicts over how to value the performance of the business after closing and how to calculate the compensation due under the terms of the earnout.

In Delaware, Vice Chancellor J. Travis Laster of the Court of Chancery put it well: “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome” (see Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 132 (Del. Ch. 2009)). For both buyers and sellers who desire to avoid future conflicts and litigation between them, careful drafting of earnout provisions is essential.

Start with Selecting the Least Controversial Metrics

The starting point for avoiding conflicts over earnout provisions is to choose the right metrics to determine whether any earnout compensation will become due. The two most common metrics are revenue based and earnings based, though other approaches — such as product launch milestones — are also possible. Using revenue as the target rather than earnings is generally more straightforward and less susceptible to manipulation by the buyer. The revenues the company generated are typically a clearer, more reliable benchmark, because earnings are determined after deducting expenses, and deductions from earnings can be a ripe source of conflict.

For example, earnings-based metrics, such as EBITDA, offer more room for dispute because they require agreement on how various expenses, adjustments, and accounting treatments will be handled in calculating whether an earnout has become due. If the parties are nevertheless insistent on using earnings as the benchmark, they need to consider how the seller’s business has measured earnings on a historical basis before the sale and how the acquiring company will calculate the earnings going forward. The parties should provide clear examples of how to calculate financial statements as exhibits to the purchase and sale agreement to ensure that they are on the same page regarding the manner in which the earnout calculation will be conducted.

Specific Guidance to Reduce the Risk of Post-Closing Conflicts

Based on our experience in handling earnout disputes, we prepared the following list of steps for company buyers and sellers to consider in negotiating an earnout provision that will help avoid or minimize future conflicts.

1. Clearly Define Accounting Practices

Whether negotiating a revenue-based earnout or an earnings-based earnout, the parties need to clearly define the accounting practices that will be used in valuing the business or any business-specific valuation issues. Vague language or assumptions and inside baseball descriptions that assume “everyone will understand what we mean” provide a recipe for future conflict and litigation. A mathematical benchmark that is based on a pre-sale valuation of the company may seem clear at the closing of the transaction, but disputes can arise down the road if the parties have not clearly defined how the target should be measured, including the following issues that can provide fertile areas for dispute:

  • Revenue Recognition Timing. The parties should specify when revenues will be recognized after closing — whether it will be done on a cash basis or an accrual basis. If management valued the business on a cash basis pre-sale, the use of accrual-basis accounting to measure earnout targets may be inappropriate and lead to disputes. The key is to make sure the parties accurately document their agreement so they are comparing apples to apples in calculating whether the earnout has been achieved.
  • Doubtful Accounts and Bad Debt. How to handle doubtful accounts and bad debt is an area that is specific to each business. Depending on the industry or business, accounts may be paid on slower timetables, and when the time arrives to compute the earnout payment, buyers and sellers may disagree on the collectability of aged accounts. The parties’ agreement must clearly define the parameters for including or excluding accounts the buyer deems doubtful in determining whether the required performance levels have been met.
  • Handling Adjustments. If the initial valuation was based on an adjusted EBITDA, the parties must set forth how these adjustments will be handled in calculating the earnout valuation. All accounting issues relating to the calculation of the earnout after the closing need to be addressed by the parties in their agreement to avoid later conflicts.
  • Expense Allocation. What expenses will be permitted and how will they be allocated to the acquired company after closing? This is particularly important if the acquired company is the target of a strategic purchase and will be folded into a larger enterprise. Corporate overhead allocations and shared services charges can significantly impact earnings calculations.

2. Retain a CPA to Assist in Drafting

Despite the significant negotiation of earnout provisions, these disputes frequently involve conflicts over how to interpret the specific requirements of the provision. One way to limit these conflicts or to prevail when they do arise is to retain a CPA who is directly involved in the actual drafting of the earnout provision.  A CPA can help identify business-specific accounting issues the deal lawyers may not anticipate, and they can ensure that the language used in the agreement closely aligns with accepted accounting principles.

3. Documentation

Another practical approach to help ensure the parties see eye to eye in calculating the performance of the business after closing is to attach financial or other revenue recognition statements to the purchase and sale agreement, which detail the model used to value the business and require that this same model be used by the parties when they calculate the earnout. Additionally, both parties should maintain documentation concerning the negotiation of the earnout provision and comments made related to the process. If a dispute arises, this contemporaneous documentation can be critical evidence of the parties’ intent.

4. Ensure Access to Records

Sellers may have less access to books and records once the deal closes. Even a seller who stays on board to manage the business after closing may have less access to financial records by the time the earnout is calculated months or years later. This lack of access can put sellers at a serious disadvantage. To address this concern, parties should consider including contract terms that facilitate the exchange of information necessary for sellers and buyers to align on the earnout valuation. These provisions should specify what records the buyer must maintain, how frequently the seller can request access to the records, and in what specific format the information will be maintained and provided.

5. Appoint a Referee

To avoid litigation, the parties can stipulate that all accounting disputes relating to the calculation of the earnout will be decided by a CPA firm the parties designate to serve as the neutral referee. For this provision to work well, the parties need to list the CPA firm (or firms) to be used in their agreement and also specify how the referee will resolve these disputes by detailing (i) the information to be provided to the referee, (ii) the process the referee is to follow to resolve the disputes, (iii) the timetable for the referee to decide the matter, and (iv) by mandating that the referee has sole authority to resolve disputes relating to the earnout.

6. Arbitration If Required 

Despite the appointment of a referee, the parties may engage in conflicts over the actions or rulings of the referee, and in that event, these disputes should be resolved exclusively by the filing of a fast-track arbitration that will take place in a matter of 60-90 days. This requirement of mandatory arbitration is the last fallback in the dispute resolution process to ensure that all conflicts between the parties relating to the earnout will never become bogged down in litigation.

Conclusion

The goal shared by company buyers and sellers of structuring a win-win deal is what leads them to adopt an earnout provision because the contingent purchase price works for both sides.  But for a contingent provision to successfully stand the test of time, it cannot result in the parties becoming locked in combat. A well-drafted earnout provision enables the parties to head off potential disputes at the drafting stage before they ever become embroiled in litigation.

Crafting an earnout provision that will avoid future conflicts is possible when the parties are assisted by CPAs during the drafting stage, when they draft contract terms based on the actual performance of the company being acquired, when they attach financial statements that govern the calculation of the earnout, and when they provide for access to all documents necessary to conduct the calculation of the earnout. Finally, if conflicts do arise, the earnout provision needs to provide for the appointment of a referee to resolve these disputes, and ultimately, for an arbitration to take place that will result in a final, non-appealable award if the parties stymie the referee’s efforts.