Published on November 18, 2024
By Wade McClure and G. Adrian Galvan
Partnership agreements will often have restrictions on the sale or transfer of a partnership’s interest. However, what happens when the agreement also provides that partners do not have the right to petition a court or an arbitrator to wind up or partition the partnership? What if the Limited Partner disagrees with the General Partner and other Limited Partners concerning a critical issue for the limited partnership going forward? Is the Limited Partner just stuck until the business dies or sells?
History Lesson on Dissolution, Termination or Winding Up?
For context, prior to the implementation of the Texas Uniform Partnership Act, Courts used terms like dissolution and termination without uniformity and sometimes interchangeably. While the Texas Uniform Partnership Act implemented distinct meanings for concepts like dissolution, winding up, and termination of a partnership, case law continued to sometime use the terms interchangeably or inconsistently. In an effort to fix the confusion, in 1994, the Texas Revised Partnership Act moved away from using the term “dissolution” of a partnership and instead defined the events requiring the “winding up” of the partnership (which would result in its termination) and events that simply led to a partner’s “withdrawal.” In contrast, the Texas Revised Limited Partnership Act still used the term “dissolution.” However, the current statute – the Texas Businesses Organization Code (“BOC”) – now refers to events requiring the winding up or withdrawal of a partner in the context of limited partnerships. In addition, the BOC specifically states that it governs all Limited Partnerships in Texas despite whether they were created prior to the enactment of the BOC. See Tex. Bus. Orgs. Code Ann. § 402.005 (hereinafter “BOC § __”).
Exiting the Limited Partnership – Withdrawal or Wind Up?
For a limited partnership, a voluntary decision to wind up the entity requires the written consent of all partners unless otherwise provided in the agreement.
If, for example, only one of the limited partners wishes to exit, she would need to request a withdrawal from the partnership for fair market value. However, under the BOC, a limited partner may withdraw “only at the time or on the occurrence of an event specified in a written partnership agreement.” BOC § 153.110. Many times, limited partnership agreements do not specify how, or allow a limited partner to withdraw.
No Current Right to Withdraw.
Prior to September 1, 1997, a limited partner had the statutory right to withdraw, if they provided 6 months’ notice to the partnership, even if a limited partnership agreement did not provide a way for a partner to withdraw. But the BOC does not provide any such provision for limited partners.
Interestingly, the BOC does list events permitting a withdrawal of a partner in a general partnership, see BOC §152, but the Code does not provide a similar list of events permitting a withdrawal of a limited partner. While some Courts have applied the events of withdrawal from the general partnerships chapter to limited partnerships, case law allowing this crossover to the general partnership provisions is limited and there is no guaranty what other Courts may hold concerning this issue.
Pursuing a Judicial Wind Up may be a better option.
When a limited partner’s agreement is silent on how a limited partner may withdraw, or prohibits this withdrawal, the BOC may be your “life-line.” The BOC permits a partnership agreement to waive or modify certain provisions, but some provisions concerning a Wind Up are nonwaivable. BOC § 153.004. One of the non-waivable provisions is the ability to petition a court to wind up the partnership in certain situations.
Pursuant to the BOC, a limited partner has the non-waivable right to petition a court to wind up the partnership by asserting and establishing that the economic purpose of the entity is likely to be unreasonable frustrated; another owner has engaged in conduct relating to the entity’s business that makes it unreasonably practicable to carry on the business with that owner; or it is not reasonably practicable to continue the business in conformity with its governing documents. BOC § 11.314.
So, a limited partner who is provided an offer for the limited partnership that the general partner refuses because of his self-interest, and the partnership agreement does not provide a manner for a partner to withdraw, should consider an Application for a Wind Up. If the Application for a Wind Up is approved, the disposition of assets would be paid or transferred as outlined in the BOC, which would generally go first to creditors to satisfy liabilities; then to partners to satisfy liability for distributions; then to partners for the return of their capital; and finally, to partners in accordance with their partnership interests.
The Downside of a Judicial Wind Up.
Pursuing a judicial wind up has its risks. While the limited partner may have the ability to invoke the judicial process to wind up the partnership agreement, the end result of the wind up would still be unclear. And there is still a risk that such action could result in counter claims for breach of contract. Specifically, the other partners may assert that the partner who invoked the judicial process breached their contractual agreement and is liable for any resulting damages.