United States: Big Head, Big Dreams, Big Mistake?

At least on paper, Episode 23 was a heartwarming story of new beginnings. Sure, Richard was subjected to an excruciating limbo during which Laurie interviewed other people for "his" job as CEO. But it turns out that was only for Richard's own good—to make sure Richard would be seen as the best choice after a rigorous selection process—not as the guy who got his job back because he was hanging around the office. There was a smallish hiccup when the indignity of Laurie's process caused Richard to snap and air all his pent-up grievances to a Code/Rag reporter, who could have ruined everything for Richard by printing his tirade. But fortunately, Big Head saved the day by providing the reporter an even bigger story about how Gavin Belson "scrubbed the internet" of negative references to Belson or Nucleus. By the end of the episode, Richard is reinstated as CEO and Pied Piper is relaunching work on the platform with a brand new batch of cheap, foreign engineers.

Meanwhile, Erlich's persistent pressure on Big Head pays off, and Big Head agrees to form a microfund/incubator/VC firm as a "general partnership" with Erlich. Thus begins Bachmanity. Erlich and Big Head each contribute all of their cash and assets to the partnership, except, notably, Erlich refuses to contribute his shares of Pied Piper. What does all that mean? To begin with, a general partnership is a separate legal entity. It is formed when two or more people agree to carry on a for-profit business as co-owners. Forming a partnership does not even require documentation. Whenever two people carry on as co-owners of a business—as long as they don't specifically form a different kind of entity (like a corporation or a limited liability partnership)—then they have formed a general partnership even if they didn't mean to do so. However, Erlich is only contributing $36,000 to Bachmanity, while Big Head is contributing the proceeds of his Hooli severance last valued at $20 million. Erlich wants documentation of this deal, so he dictates a partnership agreement for Big Head to sign.

Erlich's decision to form a general partnership is interesting though. The huge disadvantage of general partnerships is that each of the partners is personally liable for all debts and obligations of the partnership. This means that if the partnership can't pay its bills, creditors can come after Erlich's and Big Head's personal assets, like their houses, cars, bongs, shares of companies (e.g. Piped Piper) not contributed to the partnership etc. In addition, each of the partners can bind the partnership—each partner can sign contracts for which the partnership will be liable—and the partnership is liable for all the activities of each of the partners in the course of partnership business. If a partner, while doing partnership business, injures someone or commits a tort, then the partnership is liable. In other words, if Erlich runs over the Bam-Bot while buying supplies for Bachmanity, then Bachmanity is liable for damage to the Bam-Bot. And Erlich and Big Head can each be held personally liable if Bachmanity doesn't pay up. In contrast, limited liability partnerships ("LLPs"), limited liability companies ("LLCs") and corporations generally protect the members, owners or shareholders from being personally liable for the organization's debts and obligations.

For these reasons, forming Bachmanity as a general partnership has created endless possible ways things could go drastically wrong for Erlich and Big Head. And even though Erlich is pretty clearly taking advantage of Big Head, it looks like Big Head might have created the first possible threat to their fledgling venture. Back in Episode 19, Big Head signed a confidentiality and non-disparagement agreement with Hooli in exchange for his $20 million severance payment. Big Head agreed not to say anything negative about Gavin or Hooli, publicly or privately for life. But in order to save Richard's CEO job, Big Head gave the Code/Rag reporter an even bigger story about Gavin Belson's attempt to scrub the internet. When the story goes public, Hooli is almost certain to consider this a breach of the agreement and come after Big Head to get the $20 million back. What happens to Bachmanity then?!

Perhaps not all is lost. The first thing to remember is that a partnership is a separate legal entity, and it is not liable for Big Head's actions unless those actions were in the course of Bachmanity business. Talking to Code/Rag doesn't seem to be related to Bachmanity's business (Bachmanity doesn't even own Pied Piper shares). In addition, Hooli's easiest claim is that Big Head breached his personal contract with Hooli. So, most likely Bachmanity won't be directly liable for what Big Head did.

But what if Hooli proceeds directly against Big Head and a court awards a $20 million judgement to Hooli. Can't Hooli just seize all of Bachmanity's assets to satisfy the judgment? Interestingly, probably not! Here too, the reason goes back to the fact that Bachmanity is a separate legal entity. Bachmanity, not Big Head, now owns the $20 million. Moreover, a partner is not a co-owner of the partnership's property, and has no interest in partnership property that can be transferred, either voluntarily or involuntarily. In other words, Big Head does not "own" or "co-own" the $20 million any more—he has no interest in that money that could be transferred back to Hooli (either voluntarily or by a court). The only transferrable thing a partner "owns" is the partner's share of profits and losses, and the partner's right to receive distributions. The same is true of a corporation. Shareholders don't individually own the corporation's equipment, or cash in the corporation's bank account. If a shareholder's shares are transferred, the new owner doesn't gain the right to demand cash from the corporation's banker. In fact, a partnership interest is less transferrable than shares because the new owner of the partnership interest does not obtain the right to participate in management of the partnership, or to inspect the partnership's books. By contrast, shareholder voting rights transfer with the shares.

So, if Hooli gets a huge verdict against Big Head, it can probably obtain Big Head's partnership interest in Bachmanity's profits, losses and distributions, but Hooli shouldn't obtain Big Head's voting rights in Bachmanity. (Similarly, even if Erlich had contributed his Pied Piper shares to Bachmanity, Hooli wouldn't be able to obtain ownership of those shares through a lawsuit against Big Head personally.) On the facts so far, Bachmanity could be pretty safe from Hooli.

Of course, if Hooli can bring and win a claim directly against Bachmanity, then things would change. Hooli could obtain the right to seize Bachmanity's assets (including the $20 million), and to go after Erlich's and Big Head's personal assets if Bachmanity's assets were not sufficient. In this scenario, Erlich's shares in Pied Piper could be at risk even though he didn't contribute them to Pied Piper.

Erlich insists to Big Head that every successful partnership is about "committing fully, blindly and without concern for the consequences." Let's hope that pioneering spirit doesn't land Erlich, Big Head and Bachmanity in too much trouble...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
24 Oct 2017, Seminar, Los Angeles, United States

Presented by The American Bar Association White Collar Crime Committee.

24 Oct 2017, Conference, Los Angeles, United States

Corporate transactions are not just in the domain of M&A corporate attorneys. This program will cover the important role of employment and benefits counsel in shaping mergers and acquisitions. The presenters will provide practical guidance on conducting due diligence of labor, employment, employee benefits and executive compensation arrangements of target companies.

25 Oct 2017, Business Breakfast, New York, United States

Please join us for a complimentary breakfast program and networking with private equity investment banking professionals to discuss private equity activity and prospective deal flow opportunities in the technology industry.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.