Articles Posted in partnership agreement

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I had written last week about the right of first refusal common in partnership agreements, and how it may affect the sale of a majority interest in the Sacramento Kings to a Seattle Group. If you are involved in a partnership agreement contemplating a sale of an interest, you should consult with an experienced Sacramento business attorney.

Sacramento business lawyer right of first refusal.jpgThe NBC sports blog ProBasketballTalk has published what it believes is language from the Kings governing partnership agreement. It is as follows:

Section 7.3. Right of First Opportunity.
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A popular topic in Sacramento now is this possibility that the Kings may be bought by a Seattle ownership group, and moved to Seattle. The method this would be accomplished is by the Maloof family selling their majority interest in the Kings partnership to the new group- the minority partners would be stuck with a new majority partner. However, there are multiple investors in Northern California who are expressing an interest in presenting an offer that could result in the Kings remaining in Sacramento. Experienced Sacramento business attorneys know that the Kings limited partnership agreement may give them the opportunity to match the Seattle group’s offer, and possibly for less cash.

Sacramento business attorney 2.jpgPartnership agreements generally have a right of first refusal, which provides that if a partner wishes to sell their interest, and receive a bona- fide offer from a third party, the other partners have the opportunity to match the offer, in which case they would win out over the stranger. When the selling partner accepts an offer, the remaining partners have essentially an option; they can force the sale to them by matching the offer. The idea is partners want to have a say in who their partners will be, and would prefer not to have a stranger step in. They are required to match the offer, however, to be fair to the selling partner. We do not know what this partnership agreement states, but news reports have indicated it has a right of first refusal.

Generally speaking, the offer must be matched perfectly- the existing partners may not vary the terms at all. However, strict adherence to this rule gives the selling partners and third party accomplice the ability to structure an offer in a way that the others could never match. It could provide a security a parcel owned by the third party (the existing partners cannot provide as security a parcel they do not own), or they could name as consideration a valuable race horse which the existing parties could not own. In this case, strict enforcement of the perfect match rule would make the right of first refusal illusory. In such a case, the seller is bound by the standard of a reasonable person and must accept the third partner’s offer if it is the economic equivalent of the offer by the third party. In a recent decision on this subject, the Court concluded that the un-matching offer paid the seller the same net price, and that was good enough. And there’s the rub.

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It is common for people to hold their investment properties in their revocable family trust. In a Southern California decision, two trustees, Tepper & Presta, entered several partnership agreements to invest in real estate. The partnership agreement provided “upon the death of a Partner, the Partnership shall purchase the interest of the deceased Partner.”

Mr. Tepper died, and Presta wanted to buy out his interest, but his widow refused, claiming that the Trust itself was the partner, and the trust was still alive.

The court looked at the language of the agreement, which states that it is entered by Presta as Trustee of trust P and Tepper as trustee of trust T. It found that the mistake in the widow’s argument was to treat the trust as an entity, like a corporation. But, it is established under California law that a trust of this type is merely a relationship by which one person holds property for the benefit of some other person. An ordinary trust is not an entity separate from its trustees. A trust can neither sue nor be sued in its own name; it is always the trustee who is the party. Thus, in this case, the individual men were the partners, and the widow had to sell her interest.