“Trust is earned when actions meet words.”
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ACTUAL CASE HISTORIES: Raul, V.P. of a large, growing advertising agency, was invited to a virtual “Town Hall” meeting scheduled to announce the partners’ decision to convert the agency ownership from “private” to “public.” That is, selling most of the firm’s ownership interests to thousands of public investors with shares traded on a recognized stock exchange. Saul was elated, as he viewed this as a potential lifetime opportunity.
Two years earlier, the partners had agreed to forgo their annual cash bonuses to help the agency acquire related subsidiaries in pursuit of more digitally-based revenues, then extremely popular among Wall Street investors. At the virtual Town Hall meeting, attendees were invited to do the same: forgo their right to year-end cash bonuses in return for valuable stock options. To do so, each would be required to “join the partnership” by signing what is called a “Joinder Agreement.” It didn’t make them actual “partners,” but “something like” that. Hence the name “Joinder Agreement.”
The Joinder Agreement was very simple, less than one page long. It simply provided that Saul agreed to be bound by the agency “LLC Operating Agreement,” the agreement all of the partners had previously signed. Raul signed immediately; why not?
18 months later, the agency succeeded in “going public.” Something happened, though, that resulted in (a) the three Senior Partners (the “Managing Members”) each acquiring hundreds of millions of dollars in stock, and (b) all others’ interests becoming worthless. It was explained by one of the Senior Partners that “something unexpected” had happened. That was a gross understatement.
LESSON TO LEARN: A “Joinder Agreement” is almost always quite simple. By signing it, a person agrees to “Join” others as a member of the group that owns a company, most commonly (i) a Limited Liability Company (“LLC”), (ii) a Partnership, or (iii) a Corporation (“Inc.”). It is often less than one page in length. In return signors were each granted options to buy stock at a very reduced price. Here is a sample Joinder Agreement:
Consistent with the provisions of Section 24 of the XYZ Marketing Agency Limited Liability Company Operating Agreement (“LLC Agreement”) I, Raul Smith (“New Person”) hereby agree that by signing this Joinder Agreement, I will be bound by the same terms and provisions of the LLC Agreement, as modified from time to time, as a “Class D” Member, as if I was an original signatory of and party to the LLC Agreement.
I also confirm that, prior to signing this Joinder Agreement:
__ I have read and understand, or
__ I have waived my right to review, or
__ On my behalf, my appointed representative has read and reviewed it,
and I agree to be legally bound such terms and conditions.
Signed this 16th day of June, 2024, in Baltimore, Maryland, USA.
While a Joinder Agreement is simple, its ramifications, consequences and disappointments are often not at all simple.
What happened to the stock interests of Raul and his colleagues, whose interests were also lost, other than the three senior partners? Simply put, nothing that was mentioned in the XYZ LLC Agreement, or the Joinder Agreement, yet all of which was “permitted because it was not prohibited.” (You might want to read that phrase again: “permitted because it was not prohibited.”)
And that is the essence of the problem with Joinder Agreements: the LLC, Partnership or Shareholder agreements they “join” almost always give the senior-most Members, Partners or Shareholders nearly unlimited discretion to “manage” the company as they see fit. Though the LLC Agreement did not expressly spell this out, the “Managing Members” were expressly given very wide latitude to manage the affairs of the company, and by those express words were also impliedly given the right to do many other things, in order to carry out their management decisions. Here, those “other things” included:
- The “Managing Members” issued a new class of stock, Preferred Class “W,” and distributed those shares among themselves, each worth $250 million, effectively wiping out the value of all other partners’ and “joiners’” stock or stock options.
- The “Managing Members” gave each of themselves a “Success Bonus” for the successful IPO (Initial Public Offering) in the amount of $300 million each.
- The “Managing Members” placed into a special account sufficient monies to satisfy their own income taxes on their many millions of stock and cash received, what they called a “Special Tax Abatement Bonus.”
- The “Managing Members” also issued to each of themselves a Special Stock Option by which each of them could purchase company stock in the future for half the price available to public investors.
- The above steps – by the very terms of the LLC Agreement – did not require advance or even subsequent notice to the other Members, or anyone else’s consent or approval.
Were these things legal? Those who lost all of their interests, investments and dreams thought so. But when they consulted attorneys, each received similar advice: “What happened is not prohibited by the LLC Agreement you ‘joined’ by your signature on the ‘Joinder Agreement,’ and, so, it was permissible.”
This, unfortunately, is not unusual. With similar words, by similar mechanisms, and with similar bad faith, Joinder Agreements just as simple as the one above can be very, very harmful to expectations, hopes and dreams.
One last “lesson”: This phenomenon is seen not only when a company “goes public,” but nearly always when “Private Equity” investors (a) purchase partial ownership interests of a company, (b) prepare to sell those interests three to five years later, (c) sell the company to another privately held company, or (d) take the company public. In fact, this is something that happens almost every time Private Equity investors become involved in the ownership of a company. It is quite often the actual business model followed.
WHAT YOU CAN DO: Consider these seven (7) thoughts about Joinder Agreements:
1. Of course, you should take the usual “Contract Precautions.” As with all agreements:
(a) don’t be deceived by titles, as titles mean nothing at all,
(b) read carefully before you sign any agreement, perhaps two or three times,
(c) give serious thought to having an attorney experienced in these matters review it (and/or negotiate it) for you, and
(d) bear in mind that most people focus on the “rewards” offered in an agreement; attorneys and those familiar with agreements commonly focus more on the “risks.”
2. This experience is not uncommon; it is an increasingly integral part of the very business model employed. Over the past 20 years or so, this has become a very popular business model, and is the mechanism by which great wealth has been accumulated by some. The proliferation of Private Equity ownership has brought with it this increasingly cynical use of this method to concentrate the economic opportunity of entrepreneurial capitalism. Unfortunately, it has become not the exception, but the norm.
3. Access to the company’s Operating Agreement is often delayed, denied or dissuaded, a sure sign “shenanigans” may be planned or underway. Being held “subject to” the terms and conditions of an Operating (or Partnership or Shareholder) Agreement would suggest you would be permitted to read that Agreement. It is often the case that such opportunity is not provided, or only for the briefest of moments, or online. While one should persist in seeking that opportunity, understanding such agreements takes an experienced, understanding trained “eye.”
4. What Amendments and Exceptions to a Joinder Agreement might you request? There is nothing wrong, improper or insulting with respectfully requesting changes, amendments or exceptions be made to a Joinder Agreement. The more commonly requested – and at times granted – amendments and exceptions to Joinder Agreements – more precisely, how they affect you and your interests, are these:
- You will not be required to make financial contributions to the company unless, first, you freely consent to do so.
- Upon the completion of any change in company ownership, if the resultant value of your interests (or equity) is less than $XXX, the Company or Managing Members of the Company will purchase your interests for no less than $YYY.
- In all events you will be provided prompt written notice of changes to the Operating Agreement that do, or are likely to, affect your interests.
- Should the company have any “repurchase rights” or similar rights with respect to your interests, they hereby waive them.
- If your interests are lost or diminished due to an employment termination without “cause,” prior to a “Corporate Event” (sale, merger, change in majority ownership, etc.) the Company will make you whole as to your loss(es), if any.
- No new classes of equity or ownership interests, or “special bonuses or grants” will be created or granted to Managing Members without the written prior consent of a majority of non-managing Members.
- All decisions will be made subject to independent legal review, and all calculations as to ownership interests and/or their value will be subject to independent audit.
- Neither you nor your interests will be subject to so-called “drag-along” rights.
Incidentally, the granting of amendments, exceptions or modifications to Joinder Agreements is most often accomplished not by change to the Joinder Agreement, itself, but by a “side letter” to it. Recall that such an amending document does require signature of “both sides.” (To read about “Side Letters,” simply [Click Here].)
5. Do you have adequate leverage to sufficiently motivate others to grant what you want? Joinder Agreements grant to Managing Members (or their equivalents in name), both expressly and impliedly, very broad grants of discretion. That is both your “guide” to identifying the “discretion-limits” you would like.
Do you have the leverage you might need? Assessment of leverage is an art, developed over years. You will never know if you have the leverage to be successful in negotiating any matter, but one thing is certain: you will never know unless and until you try. Your leverage may be sufficient to get some, but not all, of your requests. If you can get together with others to make “joint requests,” you will definitely have more leverage. If you represent especially “unique and valuable human capital,” you will have more leverage, as well.
6. How to respond to “Don’t you trust us?” (or similar). Requests for modifications or amendments, particularly if they impose a limit of any sort on the discretion of those who manage the company, may be met with this or a similar response. There is no better response than “Sure I do, but I don’t think it is wise or prudent to trust anything or anyone blindly, do you?”
7. If you are uncertain or uncomfortable with any aspect of the process of negotiating a Joinder Agreement, we are here to assist. Over the many years of our experience in executive negotiation practice, many of our clients have used this approach, tailored to their unique set of facts and circumstances. We can assist you in this process. Of course, nothing is “guaranteed,” other than the simple notion, “If you don’t ask, you won’t get, at work.”
In Summary . . .
There is nothing wrong with good faith negotiation, but there is a lot wrong with the kind of bad faith negotiation, documentation and manipulation commonly achieved by the use of a Joinder Agreement. It is, to this seasoned compensation negotiator, on the very edge of the word “fraud.” If you see the potential for both good and bad in “navigating” a Joinder Agreement, and are willing to get “in the game,” this is your introduction to winning the game, or, at least, “leveling the playing field.” Is it an easy task? No, but it’s surely a worthwhile endeavor, and often plain old fun. One thing is for certain: this is the most common “game” in town, and if you can stand up here, you can stand up anywhere.
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SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. Requesting risk mitigation in matters related to equity compensation one way to do just that.
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