Business Owners’ / Managers’ Playbook: No Such Thing as “Harmless” Legal Doc — Call Your Lawyer Before You Sign

There really is no such thing as a “harmless” legal document.

Yet we all from time to time get requests to execute paperwork that we’re told is “a formality” or “merely technical” or “just something the lawyers want us to sign”.

The urgency of circumstances, or peer pressure, or a misplaced inclination to do-it-yourself lawyering, can weaken our resolve to act wisely.

Sarah Bradley, co-founder of a private equity fund called Kainos Capital, LLC, claimed in Delaware Chancery Court two weeks ago that two of her fellow co-founders, aided by the fund’s chief financial officer, cheated her out of her ownership stake and management role in the fund.

Or tried to at least. That’s what her lawsuit contends.

Central to this, she argues, is the fact that they obtained her signature on a “Conversion” document whose terms said that she had thereby consented to converting the fund entity from a limited liability company (LLC) to a limited partnership.

Bradley alleges that her two co-founders got her signature on that Conversion document by having the fund’s chief financial officer tell her — “fraudulently” as she put it — that the document’s sole purpose was to qualify for specified tax benefits for all of the co-founders.

But in fact, her complaint states, execution of the Conversion document was part of a conspiracy to reduce or remove altogether her ownership interest, and to squeeze her out of her management role in the fund that she’d co-founded:

” … The purported Conversion [from LLC to limited partnership] would extinguish her LLC interest, deprive her of her participation in management, and subject her to a [limited partnership] structure that was fundamentally different than the one agreed to by all of the Kainos co-founders when starting the firm.”

And Sarah Bradley alleges that she was paid zero for giving up the rights that her co-founders sought to remove from her.

…  

Even a casual reading of the complaint poses the question: Did Sarah Bradley ask a lawyer to advise her about her interests before signing this Conversion document?

Her Delaware Chancery Court complaint doesn’t address that question. And I read its 71 pages carefully to see if it might.

But it does say this:

“At the time of the Conversion, [Sarah] Bradley had relied on [the chief financial officer’s] representations that the only reason for the Conversion was to take advantage of a tax benefit and her interests would not materially change in the new … structure.”

“Relied on”

The allegation I found that I thought came closest to the did-she-consult-a-lawyer question was the following:

” … The Consent misleadingly makes no distinction between the two entities that would allow even a trained lawyer — let alone a layperson reading the document — to have any further understanding of these distinct entities with the same name”.

As Sarah Bradley describes it, this began in the following matter-of-fact email request from the fund’s chief financial officer:

“Subject: Signatures Required for Closing ….

“Sarah —

“I have attached two documents for your signature … The second is a consent for the conversion of Kainos Capital from an LLC to an LP [limited partnership] to take advantage of an exemption from self-employment tax for distributed shares of income.

“Please let me know if you have any questions.

“Thanks.

“Dave”

I have no idea of the overall merits of this lawsuit. I don’t possess any knowledge of its circumstances other than what I read in the pleading. And who-made-what-representations-to-whom-with-what-intent is for the judicial process to sort out.

In her complaint, Sarah Bradley as the plaintiff bringing this lawsuit acknowledges that she “signed” the consent to Conversion, and then devotes considerable ink to stating reasons why the words contained in that consent to Conversion should not be given legal effect.

Sarah Bradley, plaintiff and co-founder in this situation, enjoys a superstar, 20-year reputation as an investment banker and then as a private equity deal-maker. See The Wall Street Journal (subscription required); her hometown Dallas Morning News; and the trade publication Mergers & Acquisitions.

This could have happened to any of us.

For a business owner or manager it’s something to bear in mind when tempted to let our guard down.