Deadlock is Often the Ultimate Demise of Good Business

Consider this common scenario.

You’ve entered into business with your spouse, friend, or relative. At the inception of your business, you agreed that both of you would serve as the directors or managers of the Company, and you would be equal partners, each allocated fifty percent (50%) of the shares or ownership interest in the Company. Your relationship with your partner is healthy; you trust them; you trust their judgment; you’re excited about your idea, about your business. And life is great until…….

….. You have your first real dispute. The one that does not solve itself nor does it resolve with a drink at the bar.

As the business develops, you’re faced with decisions about the future direction of the business, about major business activities. Eventually, there may be a decision on which you simply cannot agree. And because you have equal control of the Company, your conflicting views ultimately stalemate or deadlock the business until you come to some agreement or decision.

Unfortunately, more often than not, people in this common scenario do not properly plan for or consider the potential for corporate deadlock, and it can lead, not only to the deterioration of a personal relationship, but also a business relationship and a business.

 HOW TO RESOLVE CORPORATE DEADLOCK

Planning for the Future.

The best way to avoid corporate deadlock is to plan ahead.  This should be a major consideration when you enter into a business relationship with anyone.  Sit down with your partner and discuss setting up a procedure for what happens if a deadlock arises.  It may not be an easy conversation to have – it may be difficult to imagine disagreeing with your partner. But sit down with your partner early and really consider the following things: (i) the nature of the business; (ii) your business plan; (iii) you and your partner’s individual ideas of the direction of the business; (iv) what problems that could arise in the business, financial or otherwise; (v) each person’s individual skill set. All these things can play a role in your deadlock discussion and the most appropriate procedure for resolving a potential deadlock. These frank conversations are even more important when one party is providing the money and the other is providing sweat equity.

Shareholders’ Agreements and Operating Agreements.

We find a lot of times that people who enter into business with a family member or close friend don’t even have a Shareholders’ Agreement or an Operating Agreement. This might be for a variety of reasons – they didn’t plan for initial legal costs and fees; they feel that they will be able to run the business through oral agreements and understandings; or, they find it uncomfortable to discuss the issues found in corporate governance documents, like transfer upon death, disability, divorce, debt, dissolution, or simply the desire of one partner to monetize and be paid out etc.

We recommend to all our clients, regardless of relationship between partners, shareholders, or members (even husband and wife), that they have some form of Shareholders’ Agreement or Operating Agreement in place establishing the governance of the entity, the rights, duties and obligations of the parties, including, if necessary, provisions addressing potential deadlock scenarios in management or between members or shareholders.

Alternative Provisions.

There are a number of different ways that an entity can resolve deadlock, and, in fact, it may be beneficial to a Company to implement multiple or hybrid deadlock methods. These methods can easily be incorporated into a Company’s governance documentation. Here are a few ways to resolve deadlock:

  1. Create a third party advisory board – either with other Members or Shareholders of the Company, or even an outside third party knowledgeable in the business and/or decision subject to deadlock;
  1. Consider implementing automatic mediation or arbitration – this may not be feasible for all companies or for all deadlocked scenarios – it can be costly and time consuming – but it can be quite effective in preventing dissolution when there is a deadlock for a major decision;
  1. Consider splitting or designating certain decisions to each partner – for examples, this partner has the ultimate decision making authority on banking and property, and the other partner has the ultimate decision making on sales and marketing – this method requires the partners to determine strengths and weaknesses and delineate accordingly – this method is useful when doing some form of hybrid deadlock provision;
  1. Consider a buy-out provision – if the partners cannot agree, one partner can buy the other partner’s shares or membership interest – there are a number of ways to structure a buy-out provision;
  1. If nothing else works, provide for a definitive right to withdraw or force dissolution or liquidation without court intervention. In this instance, you may be left relying on the default solutions contained in the Florida Statutes [Sections 605 and 607] or the decision of a judge who is unfamiliar with your business.

Need help in putting in place a shareholders’ agreement or an operating agreement?

Need help revising your current agreement with some alternative deadlock provisions?

The Walk Law Firm is available to review your current Shareholders’ Agreement or Operating Agreement in order to help you determine if, in fact, it’s appropriate for you and your partner(s).  Document review and drafting can be handled on a Flat Fee or Fixed Fee basis. To learn more, please contact us at the Walk Law Firm.

 

Business Divorce – The Not So Odd Couple

Recently, I added the certification of family law mediator to my already extensive list of mediation certifications to the surprise of many of my friends and associates. It should not be surprising that an attorney with an active mediation practice would mediate family law matters in addition to other business, insurance, bankruptcy, patent and intellectual property and other disputes, it’s just that my law practice has been heavily focused on business matters and it appears that I have never been engaged in the area of family law, but actually I have.

My typical practice involves representing businesses and their owners in all aspects of business life.  I have been the Chief Legal Officer and Chief Administrative Officer for public and private companies, have navigated Boards of Directors and CEOs through Chapter 11 Bankruptcies, hostile take overs, mergers, acquisitions and a variety of other crises. Sometimes those crises and matters include the addition of new owners, the separation of executives and owners, disgruntled minority owners and overcoming deadlocks. In my post “big” business life, I have started a law firm that offers the same quality and level of service provided to our nation’s biggest companies to small and middle-sized businesses on a fee structure that smaller businesses can afford. The issues are no simpler; the legal services no less complex, and the need to protect business assets, confidentiality, dignity and reputation at least as challenging.

Complicating the business of small business today is the close relationship between business partners and life partners. I am finding often that the break-up of life partners can cause mass disruption to unrelated business interests and partners, especially when there are no provisions in operating agreements or shareholders agreements covering these issues. Sometimes, life partners are business partners as well. Even without the complication of life partners, I am finding that business people go into business with others without adequate diligence and without formalizing agreements at all. In the last six months alone, I have been engaged or consulted as either a mediator or lawyer in at least a half dozen situations in which business partners are seeking a “business divorce.” And I must say, my skills and knowledge gained through family law mediation combined with my business law knowledge and acumen has come in pretty handy.

If I can help you as a mediator confidentially settle your business disputes, or help you as an attorney negotiate your deal with your partners, please contact me by completing the form below or calling our office at 813.999.0199.

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