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Management Rights Are Unique And Irreplaceable

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In 2011, I was hired to represent some doctors against a hospital in Houston. The doctor clients were limited partners in the hospital, and the hospital decided to buy-out the interests of the limited partner doctors. The hospital invoked provision of the Texas Securities Act and basically attempted to rescind the original purchase of the limited partnership units by all of the doctors that bought those units. I filed a temporary restraining order to prevent the rescission from going forward, and the Harris County State District Court judge granted that request. The hospital was, therefore, prevented from continuing the buy-out of the doctor, limited partners.

I stepped out of representing the doctors in the case, but the case continued. Recently, the Houston Court of Appeals issued an opinion that is significant for any partnership, limited liability company, or closely held corporation. A different Harris County District Court denied my former clients’ application for a subsequent temporary injunction when the hospital terminated their partnership interests. In order to obtain a temporary injunction, a party in a lawsuit has to meet certain requirements. For example, a party mush show that it has a likelihood of succeeding on the merits; it will suffer an irreparable injury; and it does not have an adequate remedy at law. These legal requirements require evidentiary support.

The limited partners argued that a termination of their partnership rights would also have the consequence of causing them to lose management rights in the partnership. In this case, the limited partners had seats on the board of the hospital and had involvement in the hospital’s governance. In order to show the limited partners had no adequate remedy at law that was compensable by money damages, they argued that the loss of management rights is unique and money is not sufficient to compensate them for that loss. The Court of Appeals concluded they were right: “With the termination of their partnership interests, they lose several management rights, including the right to participate with other Class A unit holders in selecting a Governing Board representative who wields 49% of the Voting Interest and can block several major actions, such as capital calls.”

Importantly, the Court of Appeals opinion gives credence to the argument that management rights are unique and irreplaceable and cannot be measured by money damages–all of which is key to obtaining a temporary restraining order.

When one is involved in a fight with other partners over management of a going concern, a temporary restraining order is a vital tool in litigation to help preserve the status quo. Obtaining a temporary restraining order is not easy, but hiring lawyers with the right skill set to make arguments that the law either recognizes or will recognize is critically important.

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