By Chris Bankler

In Energy Founders Fund, LP v. Daskevich, Judge Brian Stagner addressed a recurring issue in M&A transactions: when should affiliate status be measured? The court’s answer was unequivocal: at the time of the transaction, based on who actually possesses control, not on rights that come into existence only after closing.

The opinion is notable for its treatment of a contractual “Affiliate” definition as a strictly temporal concept. Focusing on the LLC agreement’s use of the word “possession,” Judge Stagner concluded that affiliate status depends on present control, not future rights that spring into existence only after a transaction is consummated.

Background

Gage Western, LLC was governed by a Company Agreement that established a multi-class ownership structure. EFF held Class A membership interests; Phillip Daskevich held substantial minority interests through Class B units and served as the Class B Director. The board consisted of three directors: a Class A Director, a Class B Director, and a Management Director.

Article 9 of the Agreement governed transfers. Section 9.2 provided that a “Dragging Member” could compel all other members to participate in a “Controlling Sale” defined as “a bona fide sale . . . to one or more persons who are not Affiliates of the Dragging Member.” EFF sought to sell its interest to GW Allen, LLC, a special-purpose acquisition vehicle formed by PJC Investments.

The complication arose because EFF negotiated significant post-closing rights in GW Allen, including board-designation rights, quorum protections, and veto authority over certain actions. The minority members argued that those future rights effectively made GW Allen an “Affiliate” of EFF before closing, rendering the drag-along invalid.

The pre-closing governance picture was undisputed. PJC formed GW Allen, owned 100% of its equity, appointed its sole manager (Coleman Curry, PJC’s COO), and made every decision concerning the entity’s formation, capitalization, and deal strategy. EFF held no equity, no voting rights, no managerial authority, and no contractual right to direct GW Allen’s affairs before closing.

The Court’s Rulings

1. Affiliate Status Requires Present Control

Judge Stagner began with the language of the LLC agreement itself.  The agreement defined an Affiliate as an entity that “controls,” “is controlled by,” or is “under common control with” another person. Control, in turn, was defined as the “possession” of the power to direct management and policies.

First, the definition is written entirely in the present tense. As the court explained:

“An Affiliate is any entity that ‘controls,’ ‘is controlled by,’ or ‘is under common control with’ the specified person. ‘Control,’ in turn, means the present ‘possession’ of the power to direct management and policies. The term ‘possession’ is not an incidental choice of words. It denotes current, existing authority, not a future or contingent entitlement to it.” (¶ 28)

Second, the definition focuses on actual operational governance—not on who had bargaining leverage during negotiations. Third, the catch-all phrase “by contract or otherwise” expands the methods by which control may be established, but it does not eliminate the temporal requirement. As the court noted, to hold otherwise “would be to read the word ‘possession’ completely out of the definition.”

That distinction proved decisive.

The court concluded that negotiating for future governance rights is fundamentally different from possessing those rights.  As Judge Stagner observed, “A party negotiating for future rights does not yet possess them, no matter how certain their eventual receipt may seem.” (¶ 28)

2. Control Means Operational Authority

The opinion also provides a useful discussion of what “control” means in the affiliate context.

The court rejected the notion that affiliate status turns on bargaining leverage or influence during negotiations. Instead, the inquiry focuses on operational authority.  Judge Stagner framed the question in practical terms:

“The relevant inquiry is therefore straightforward: before closing, who could actually run GW Allen? Who had authority to appoint managers, bind the company, or direct daily operations?” (¶ 29)

The undisputed evidence showed that PJC, not EFF, held those powers.

PJC formed GW Allen, owned 100% of its equity, appointed its manager, and controlled all decisions relating to the acquisition. Before closing, EFF held no ownership interest, no voting rights, no managerial authority, and no contractual right to direct GW Allen’s affairs.

3. Negotiating for Rights Is Not the Same as Possessing Them

A significant portion of the opinion focuses on the parties’ negotiations over GW Allen’s future governance structure.  The minority members pointed to draft agreements showing that EFF actively negotiated for board seats and governance protections. In their view, those negotiations demonstrated that EFF already exercised sufficient influence to qualify as an Affiliate.

The court saw the same evidence very differently.  Judge Stagner explained that the negotiation history actually undermined the argument for affiliate status:

“This back-and-forth negotiation is difficult to reconcile with the notion that EFF already controlled GW Allen. If EFF truly possessed the authority to dictate GW Allen’s governance before closing, PJC’s resistance would have been meaningless.” (¶ 35)

In the court’s view, the negotiation process demonstrated the opposite of control. It showed that EFF was bargaining for rights it did not yet possess.

4. Post-Closing Rights Cannot Be Applied Retroactively

The minority members’ strongest argument focused on the LLC agreement’s use of the phrase “in connection with” a proposed transfer. They argued that the court should evaluate the transaction as an integrated whole and therefore consider the post-closing governance rights EFF ultimately received.

Judge Stagner agreed that the transaction documents should be read together, but rejected the conclusion the minority members sought to draw from that principle.  The court explained:

“The phrase ‘in connection with’ sweeps in related documents for interpretive context, but it does not authorize the Court to declare a pre-closing entity to be an affiliate based on rights that spring into existence only after the transaction is consummated.” (¶ 38)

The opinion repeatedly characterizes the defendants’ position as a “retroactivity theory.” The fundamental problem with that theory is that it attempts to move post-closing rights backward in time and treat them as if they existed before closing. The agreement’s text did not permit that result. And as a practical matter, if the validity of a pre-closing drag-along notice turned on post-closing governance documents, the legal status of an already-issued notice could not be verified until after closing, making the drag-along mechanism “commercially unworkable.”

5. Commercial Reality Matters

The opinion concludes with a practical observation about modern deal structures.  Judge Stagner noted that rollover equity, board-designation rights, veto protections, and other forms of post-closing governance participation are commonplace in M&A transactions.

Under the defendants’ interpretation, the mere negotiation of such post-closing rights would transform an otherwise independent buyer into an Affiliate during the drafting phase—nullifying the drag-along rights the parties expressly bargained for. And the theory provided no principled stopping point. It would apply equally to a seller accepting passive rollover equity and to one negotiating substantial governance protections, leaving courts to draw “inherently subjective lines regarding how much anticipated future influence is too much.”

The court declined to adopt an interpretation that would produce such commercially unreasonable results, particularly when the Company Agreement’s Affiliate definition “is framed strictly around existing control relationships, not contingent future rights that arise only after closing.”

Conclusion and Takeaways

This opinion provides useful guidance on how Texas courts may approach affiliate-status disputes in transactional settings. Three points stand out.

First, affiliate status is a temporal inquiry. The court’s analysis focuses heavily on timing, who actually possesses operational authority at the relevant moment. Negotiating for control is not the same thing as possessing control. A party that expects to receive governance rights after closing does not, for that reason alone, become an Affiliate before closing.

Second, the opinion validates modern deal structures. Sellers frequently retain rollover equity, board seats, veto rights, and other forms of post-closing participation. This decision confirms that those arrangements, standing alone, do not create affiliate status before the transaction closes, a conclusion that matters for any practitioner advising on drag-along, tag-along, or ROFR provisions conditioned on non-affiliate status.

Third, for practitioners drafting LLC agreements, the case underscores the importance of how “Affiliate” is defined. Here, the definition’s use of the present-tense word “possession” did substantial work. If the drafters had intended to capture anticipated future governance rights, they could have written a forward-looking restriction. They chose not to, and the court enforced that choice.

The bottom line: when a contract asks whether an entity is an Affiliate, the answer depends on who runs it today, not on who plans to run it tomorrow.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information, please contact Chris Bankler or a member of the Trial & Appellate Litigation practice.

Meet Chris

Chris Bankler focuses on the resolution of disputes for businesses and financial institutions. He counsels clients through the process of complex business litigation, including general business disputes, fraud claims, breach of fiduciary duty cases, and complex business bankruptcy litigation. He has served as litigation counsel in more than 100 cases in state and federal courts, as well as FINRA and AAA arbitrations.