Deadlock: When Business Partners Simply Can’t Agree

Deadlock occurs when the owners of a business cannot agree and, as a result, the business and affairs of the company cannot be conducted to the advantage of the owners generally.  The discord can be over major decisions or a broader breakdown of the relationship. Either way, there is an extreme risk of business grinding to a halt, or in the worst case, of a lawsuit being filed asking a court to dissolve the business entirely.

Planning Ahead Avoids Deadlock

Ideally, the owners have clearly laid out how key issues will be handled in the company’s operating documents, whether an operating agreement for a limited liability company, a partnership agreement for a partnership, or a shareholders’ agreement for a corporation.  Some of the important questions this document should answer are:

• How are day-to-day decisions going to be made?
• Who is going to operate the business?
• How will profits and losses be split?
• Are there decisions that need a supermajority or unanimity?

If the owners did not document their agreement on these essential questions, state law will provide default provisions which, unfortunately, can be cumbersome and often different than what the owners want. Particularly in 50/50 relationships, it is unrealistic to think that the owners will have time to make every small decision together or see eye to eye on every larger decision.    

Are we deadlocked?

To resolve quickly any deadlock, the operating document must define “deadlock” and detail dispute resolutions short of going to court.  The deadlock definition needs to be very specific as to what is an actual deadlock and how long it was last. Often the deadlock period is 30 days.

What do we do now?

If the operating document has a deadlock procedure, you follow the steps if there is a deadlock.  Some options include:

• Dispute Resolution.  A common structure is to go through mediation and then arbitration to determine if the deadlock can be resolved. 
• Tiebreakers.  The operating document may have specific tiebreakers to allow one owner to make a decision when deadlock occurs. Tiebreakers could be based on the equity split, supermajority requirements, or clear statements of authority for certain departments or activities of the business.
• Buyouts.  Buyouts are sometimes structured within the operating document.   It will include a defined process for an owner to either buy out another owner or be bought out. Core terms of price, timing, and method of payment could be spelled out in the operating document, or they can be freshly negotiated.

Let us help you design the structure of your company to avoid deadlock or work it out if you are already stuck in a deadlock.