Deadlock among business owners: Part 2
January 19, 2018 - Posted by: admin - In category:
Deadlock among business owners can be an awful thing for the individuals involved and for the company.
In the prior post, we began this discussion by noting this reality and how deadlocks can come about in unintended ways. In this post, we review a few methods to prevent a deadlock from happening and how to deal with an impasse among business owners.
Perhaps the most straightforward way to avoid a deadlock is to avoid a strict 50/50 allocation of voting rights. The concept would be the same if there were three owners (each with 1/3 ownership and voting) or four owners (each with 25% ownership and voting), etc. Likewise, the concepts discussed here apply equally to LLCs, corporations or partnerships.
To use the example of two owners, voting could be divided 51/49 so that one of the members has the ultimate authority to make decisions in the event of a disagreement. By the way, please remember that it is permissible to separate ownership and related allocation of profits and loses from voting rights. Therefore, two co-owners could agree to a strict 50/50 split of profits and loses, but also agree that when it comes to voting, one of the owners would have ultimate decision-making authority concerning major decisions.
Along similar lines, the LLC Agreement (or bylaws, it the case of a corporation) could designate specific categories of items for which both parties much mutually agree and then also contain a list of things for which each person has ultimate authority. For example, perhaps one of the owners is a financial guru, and therefore it might make sense to give items related to taxes, investments, and other strictly financial matters to such person. Then, maybe the other person is excellent at dealing with other humans, their personalities, strengths and weaknesses and related “H.R.” issues–it would then make sense to give that owner ultimate authority when it comes to hiring, firing and otherwise dealing with company employees.
If those approaches are not acceptable, the LLC operating agreement could include a required dispute resolution procedure. Such provisions often call for mediation and arbitration to resolve large disputes using professional mediators and arbitrators. An intermediate step could be the designation of a “neutral” third party, such as an attorney, accountant or another party acceptable to both parties to hear and help resolve a disagreement.
A “Texas shoot-out” provision is a more drastic measure, but sometimes a useful tool to have available. The concept is that if two owners are unable to come to a resolution, either by working through things together or using prescribed dispute resolution procedures such as mediation or arbitration, then either owner may then offer to buy out the other owner according to specified terms. This is a rather drastic solution (obviously) and is akin to a business divorce.
It is worth pausing here to observe that in many ways, joint business ownership can in some ways be similar to a marriage. Sometimes spouses simply need help to work out their differences and then can move forward with a healthy/happy continuation of the marriage. In the same way, business owners also sometimes require help to get over an obstacle or two and learn how to avoid future problems. Likewise, some marriages are beyond the point of saving and repair (for whatever reason), and divorce may then be the only option. Similarly, there are times when a Texax shoot-out or some other method of buy/sell mechanism is needed to provide an orderly and equitable path for one or more of the owners to exit the company, while the other owner(s) carry on with the business enterprise.
To summarize, there are various approaches to take, beforehand, to avoid and deal with deadlocks among business owners. It is obvious that such things are best planned for and sometimes prevented long before the moment of crisis. Otherwise, if there is no such planning and no such utilization of desired mechanisms to resolve disputes (i.e., when there are not customized business foundational legal documents), then very often business owners find themselves at an impasse, unable to move forward without painful, lengthy, expensive and otherwise horrendous litigation which can result in a lose-lose (owners and company) situation.
Take the time now to consider how you and your co-owner(s) want to handle situations of disagreement when they arise (not if, but when), then sit down with a corporate law attorney to have him/her help you craft solutions and tools into your LLC operating agreement, bylaws or partnership agreement that are consistent with your wishes. It may be that you are lucky and never need to use such things. But far better that you end up in that situation than finding yourself in the middle of a deadlock, an unresolvable situation, with no other option than arguing about it in depositions and court hearings. The investment of resources to proactively plan for these things now will be far less than the required resources to deal with the emergency later.