Is Your Company At Risk Of Deadlock?

At the planning and inception stage, it is common for two business partners to split everything “50/50.”  It seems at first glance to be fair and equitable to split the profits, losses, and managerial decisions equally between the owners.  But what happens when disagreements in running the business arise?   Companies with two partners, or any even number of owners who split into two equal sides, who can’t resolve business disagreements become “deadlocked.”  A deadlocked company will grind to a halt, and the company’s growth prospects and even its future existence will be threatened. Steps must be taken to protect against this destructive business risk.  

5 Steps to Navigating an Owner Deadlock 

• Protect the Business in its Governing Documents. It is essential that the business owners engage experienced business counsel to advise and draft a shareholder agreement, company bylaws, LLC operating agreement, and other appropriate governing documents to specifically protect against owner deadlock.  Adjusting owner equity percentages, providing for overruling authority on managerial decisions, and establishing a deadlock proof board, among other tools, are some of the ways to prevent future deadlock at the formation stage.  For existing companies that are deadlocked, the first step should be to review the governing documents to see if they already provide for procedures to break deadlocks. Governing documents should be amended to protect against deadlock before it happens.   
• Acknowledge an Owner Deadlock Exists. The longer an owner deadlock lasts, the greater the risk to your company. Everything can come to a halt, and business performance will suffer when managerial decisions can’t be made. Acknowledge that the company is deadlocked and that it is crucial to act as quickly as possible to resolve it.  The sooner the deadlock is acknowledged, the sooner the owners can move toward a resolution, and the sooner the business is operating as it should.
• Take a Proactive Approach to Resolution.  Once a deadlock is acknowledged, owners must emphasize working towards a resolution that protects the business.  If the governing documents do not provide guidance on resolving deadlocked management, consider taking some of the following actions to seek out an acceptable resolution: mediation or arbitration with a neutral third-party, informal negotiations, engaging an outside executive,or adding a board member or owner. By choosing to focus on protecting the interests of the business and all owners, the owners signal to each other that they seek to resolve the impasse and protect the future of the business.  This kind of proactive approach to dispute resolution will prioritize a positive outcome over a negative outcome.
• Litigation May Be Inevitable.  Many times, deadlocked owners are not sufficiently committed to an early resolution of their deadlock and litigation is necessary.  Even if the company survives, litigation will drain resources, waste time, and distract the owners from supporting the business.  There are tools available when a deadlocked company is in litigation that will help the business continue operating and provide for sound managerial decisions while the parties attempt to resolve the dispute.  For instance, a receiver – a third-party with business management experience appointed by the court and typically paid out of the revenues of the business – can manage and operate the business in the best interest of the deadlocked owners during litigation and will help the company to make necessary decisions.
• Deadlock May Result in Dissolution.  Deadlocks often have no winners. Instead, the business suffers and dissolution is the only realistic outcome.

Contact The Frazer Firm

For more information regarding protecting your business and taking steps to avoid and resolve owner deadlocks, schedule a consultation with an experienced business attorney at The Frazer Firm today.