How to Get Rid of a 50/50 Business Partner in Texas When There Is No Tie-Breaker

There are three ways out of a 50/50 deadlock in Texas, and only three: the company agreement already contains an exit mechanism, the two owners negotiate one, or a district court is asked to wind the company up. Texas law supplies no fourth. A member of a Texas LLC has no right to resign and be paid out and no power to expel anybody, so how to get rid of a 50/50 business partner is a question about what was signed years ago, not about what the statute permits.

That is unwelcome news in the first week of a business divorce and useful news in the second, because it narrows the problem to two documents: the company agreement and the balance sheet.

Texas Business Organizations Code § 101.107 is one sentence: "A member of a limited liability company may not withdraw or be expelled from the company." There is no statutory buyout price, no appraisal right available on demand, and no default mechanism that obliges the company to write anyone a check.

The consequence for a company owned half and half is specific. Neither owner can outvote the other, neither can remove the other, and neither can force a sale of the business. Each holds a veto over everything and a key to nothing.

Under TBOC § 101.052(a), the company agreement "governs: (1) the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and (2) other internal affairs of the company." Section 101.052(c) goes further: a provision of the LLC title "may be waived or modified in the company agreement," except for the provisions listed in § 101.054. Section 101.107 is not on that list.

An agreement can therefore build the exit the statute withholds: a buy-sell triggered by defined events, a put right at a formula price, a right of first refusal, or a buy-sell offer clause — the "shotgun," where one owner names a price and the other picks which side of it to take.

The difficulty is that a large share of two-owner agreements, especially those adapted from a template at formation, contain restrictions on transfer and no exit mechanism at all. They are careful about who may not buy in and silent about how anyone gets out. Transfer restrictions in LLC and partnership agreements are worth reading closely for that reason: they often turn out to be the only clauses in the document that speak to an ownership change.

TBOC § 11.314 gives a district court in the county of the company's registered office or principal place of business jurisdiction to order the winding up and termination of a domestic LLC "on application by an owner," if the court determines that:

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."

Two features of this section are routinely missed. It is a wind-up remedy rather than a buyout remedy — the relief the statute names is the end of the company, not a payment to the applicant. And it sits in Chapter 11, which § 101.054(a)(6) places outside what a company agreement may waive or modify. A clause drafted to strip owners of that application is drafting against the statute.

The other court-appointed remedy owners ask about is a receiver, on the theory that a neutral party can run the company while the dispute is worked out. TBOC § 11.404(a)(1)(B) does name a ground built for deadlock: that "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."

Subsection (b) is the part that does the work. A court may appoint a receiver "only if" circumstances necessitate the appointment "to conserve the property and business of the domestic entity and avoid damage to interested parties," all other requirements of law are complied with, and "the court determines that all other available legal and equitable remedies, including the appointment of a receiver for specific property of the domestic entity under Section 11.402(a), are inadequate." The inadequacy of every other remedy is an element to be established, not a closing flourish.

Constructed example. Not a real matter, and the figures are illustrative.

Two owners hold a Texas LLC in equal halves. Their company agreement carries a buy-sell offer clause: either member may serve notice naming a price for 100% of the equity, and the other has 30 days to elect either to buy the offeror's half at that valuation or to sell her own half at it.

Owner A serves notice at $1,800,000 for the whole company — $900,000 a half. Owner B's own view, built on the last two years of earnings, is that the business is worth about $3,000,000, which would put her half nearer $1,500,000.

B holds $120,000 in cash. To buy, she has to fund $780,000 inside 30 days, against a company whose two owners are in open conflict, whose principal assets are customer relationships rather than collateral, and whose recent statements a lender will read alongside the dispute. The financing does not arrive. She sells at $900,000 and gives up roughly $600,000 measured against her own valuation.

Nothing in the clause was unfair on its face. It was perfectly symmetrical. The asymmetry was cash. A 90-day election window, an express financing contingency, or a price set by appraisal rather than by the offeror would each have produced a different answer out of the same paragraph.

The statute sets the outer boundaries. Inside them, the result is decided by three things a court never rules on: which owner can write or borrow the purchase price, which owner the customers and employees follow, and which owner can afford to spend two years on the dispute.

That is why most of the work worth doing happens before anything is filed — reading the agreement closely enough to know which clauses can be triggered and by whom, getting a defensible valuation and purchase price in hand, and understanding what a purchase by the company itself would do to the balance sheet compared with a purchase by the other owner personally. Redemption agreements run on different mechanics from a cross-purchase, and the choice is easier to make early than to unwind later.

These are general principles. Every deadlock turns on its own documents and its own numbers, and circumstances differ, sometimes decisively.

If you are in one, a sensible first step is to read the company agreement's transfer, buy-sell and deadlock provisions against a current balance sheet, and to do it before either owner sends the letter that starts a clock.

Disclaimer. This publication is provided by Amini & Conant, LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Should the reader seek further analysis of the subject matter or answers to specific questions about the subject matter, please contact the author at marketing@aminiconant.com. This publication is considered advertising under applicable state laws.

Back