Partnership Rights: Lessons Learned From the Arizona Diamondbacks
December 7, 2020
Partnership Rights: Lessons Learned From the Arizona Diamondbacks
Buying a professional sports team is a dream for many, but the resources and connections to do so are hard to come by. Fortunately, for some, the ability to buy a minority stake in a team is a more feasible goal. Purchasing a minority stake allows you to be considered an owner but with a much less financial commitment.
These types of ownership deals allow interested parties to enjoy the “perks” of ownership while providing the team with millions of dollars for team operations. However, this level of ownership does not grant authority over team decisions or franchise direction, on or off the field.
Similar to most other MLB teams, the Arizona Diamondbacks have minority owners who operate through a type of limited partnership where individual investors and businesses can own shares.
In the early 2000s, Alfredo Molina, Jim Weber, and Carlisle Investments became Diamondbacks limited partners, all carrying less than 1 percent of interest. Recently, these limited partners brought a suit against the Diamondbacks’ general partner, principal owner, and “face” of the team, Ken Kendrick, who controls or influences around 90 percent of the partnership. The suit alleged, among other things, that Kendrick used illegal tactics to purge them from the partnership.
In their complaints, Molina, Weber, and Carlisle argued that, by trying to invoke a unilateral buy-up/buy out mandate, Kendrick violated numerous partnership principles. The buy-up/buy-out provision required the limited partners to contribute more capital to the partnership or be bought out.
As a result, the limited partners alleged breach of contract, citing that the buy-up/buy-out provision was not expressed in the partnership agreement. They further alleged breach of fiduciary duty and breach of implied covenants of good faith and fair dealing, as they believed Kendrick’s intended effect of the buy-up/buy-out mandate was to force them to not only sell their stakes but to sell them at below-market value.
Understanding Partnership Rights
Many businesses mistakenly believe that limited partners have few rights and protections. It is true that they typically do not have the right to vote unless it is provided in their partnership agreement, and they are not allowed to participate in day-to-day organizational management or to challenge the general partners’ operational decisions.
However, while the law requires that they stay passive as far as management is concerned, it also offers them a number of ways to ensure their financial interests are protected.
For example, a limited partner has a right to information about the partnership. Though it is somewhat restricted, they are entitled to a copy of the annual financial statements and may request to verify its accuracy against the business’ books.
Additionally, limited partners may:
– Serve as an agent or employee of the company
– Serve as board member, officer, or director
– Provide consultation to general partner(s) and attend board meetings
Furthermore, according to the General Partnership Act, limited partners are allowed to be involved in decision making when it comes to:
– Dissolution/amendment of the partnership agreement
– Addition or removal of partners, limited, or general
– Disposal of corporate assets
– Any material changes in the scope of the company
General partners have the right to manage the general operations of the company. They have the authority to run day-to-day operations, set policies, oversee the hiring and firing of personnel, and contract for business services.
They also have the right to:
– Utilize partnership property for the benefit of the partnership
– Manage partnership financials and inspect books and records
– Assign partnership interest
– Institute legal action against the partnership
General partners, however, are also personally, jointly, and severally liable for all partnership obligations and acts.
All partners, regardless of interest share, have a duty to impart mutual confidence and understanding in the partnership as well as share in losses and act within the scope of their authority. Additionally, partners are bound by various fiduciary duties, including, loyalty, good faith and fair dealing, care, and disclosure.
In the case of the Diamondbacks, though the limited partners did not have managerial rights, as noted above, they did have the rights to be involved with decisions that affected the partnership or the partnership agreement. In this case, the unilaterally enacted buy-up/buy-out provision may be considered a material change or amendment to the nature of the agreement.
Since that change was not expressly provided for, the limited partner could argue they should have been involved in the decision. The General Partnership Act would likely support this contention. However, Kendrick argued that the decision was not, in fact, a partnership agreement call but was more focused on the day-to-day operations of the organization.
He indicated that the purpose was to “streamline their ownership group and minimize the disproportionate number of owners with very small equity stakes” for the sake of enhancing “financial stability.”
Whether issuing an ultimatum for additional capital contributions in lieu of buyout constitutes a change to the partnership agreement or is solely an operational call under the purview of a general partner is a matter of legal interpretation. To avoid this debate, your partnership agreement should be able to define what constitutes a managerial decision to be governed by a general partner versus what decisions necessitate limited partner involvement.
Similarly, another aspect of the limited partners’ complaint is regarding the valuation of the shares. In the complaint, the limited partners claimed that Kendrick initially offered to let the limited partners hire their own valuation firm and pledged that the partnership would resolve any pricing differences from each firm.
However, Kendrick later rejected the idea of a second valuation. Again, this issue was not addressed in the partnership agreement. Addressing how the partnership will handle issues that come up during disputes is just as important as outlining duties and financial information. Items like share valuations at buyout, dispute resolution, venue, and choice of law are all things that you should discuss with your attorney and partnership when drafting your agreement.
Lastly, all partnerships have duties implied by law. The limited partners, in this case, alleged bad faith dealings with the sole purpose of pushing them out under the guise of “streamlining” ownership. If they presented evidence to support this claim, they could argue that the buy-up/buy-out is a constructive denial of their interest, which would, again, give them decision-making rights under the General Partnership Act.
To refute this claim, Kendrick would need to offer policy statements that support the benefits of contracting the sizes of limited partners and show that his acts have been consistent with league and partnership policies.
In instances where fiduciary duty is questioned, the best defenses are candor, reasonable movement, and good faith. Fiduciary duties are delineated under state statutory law. Partners may limit, expand, or eliminate fiduciary duties by mutual agreement, provided that the changes are reasonable, but they cannot be eliminated entirely.
Disputes regarding partner rights are a prime reason why your partnership agreement should be negotiated with specificity. Working with an attorney to develop a well-drafted agreement avoids vagueness in interpretation.
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