Implications of a Texas Supreme Court Ruling Confirming Customary Investment Practices for Private Equity Sponsors
On June 23, 2023, the Texas Supreme Court issued a decision embracing the rule that an investor can engage in customary investment practices without becoming liable for torts committed by a portfolio company.
The underlying case stems from an explosion at the TPC petrochemical plant in Port Neches, which plaintiffs allege caused widespread property damage and required thousands of people to evacuate their homes on Thanksgiving Eve in 2019. Thousands of plaintiffs sued TPC as well as its private equity sponsors. Plaintiffs brought direct claims against the private equity sponsors, seeking to argue that the sponsors were negligent in exercising control over TPC through their board majority and that they made financial and operational decisions that lead to the explosion.
In finding for the private equity sponsors and supporting the long-held notion that the creation of limited liability entities “lies firmly within the law and is commonplace,”1 the decision specifically names several customary investment practices that will not expose an investor to liability or constitute operational control:
- appointing members to a subsidiary company’s board (“Even when one company appoints a loyal employee to the board of a separate legal entity, the appointing company does not become liable for the board’s conduct.”2);
- supervising a subsidiary company’s finance and capital budget decisions;
- articulating general policies and procedures for a subsidiary company to follow; and
- monitoring a subsidiary company’s performance.
The decision also contains a procedural victory important to private equity sponsors facing similar claims in the future. While historically Texas trial courts have frequently required plaintiffs to defend similar actions through discovery, this decision emanated from a motion to dismiss the pleadings. This fact could help sponsors extricate themselves from similar litigation claims more expeditiously and without the burden of costly and time-consuming discovery.
1 In re First Rsrv. Mgmt., L.P., No. 22-0227, 2023 WL 4140454, at *4 (Tex. June 23, 2023) (quoting SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 455 (Tex. 2008)).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.