Here’s a problem that cost parties to a business entity a lot of money, but could have been avoided if the underlying contract were written to provide a way out in the event of a dead end business stalemate. It could occur in the context of a joint venture partnership between two entities, or it could occur in the context of four owner/operators of a business entity. Settlements can provide dispute resolution techniques, but the big elephant in the room that no one thinks about is that despite all the underlying issues, there are state statutes under which there can be a court order to dissolve the business. .

If you’re the general counsel of a company involved in a strategic partnership, take note. But I’ll describe the problem in the context of four owners of what was essentially a limited liability joint venture. After a few years, there were some disagreements, and the 4 owner/managers found themselves divided into two factions, one faction wanted to dissolve the business (the “Dissolvers”), the other faction wanted to continue the business (the “Continuers”). There was no non-compete agreement governing the parties to the company, which was a trading company. The underlying Agreement stated that all decisions must be made unanimously.

In some cases, the Dissolvers will use a ploy to dissolve themselves so they can continue business under a new name and obtain a business divorce from others. In many cases, there is a non-compete clause contained in the original agreement, but sometimes that clause is not cleverly worded; The parties may not compete with the entity, but what about competing with each other?

So, despite issues like breach of contract, breach of fiduciary duty, lack of good faith encompassing the underlying dispute, one factor remained: there was deadlock, and the Dissolvers made it known that under the terms of the statute of the State, the entity could be dissolved, without a hearing on the underlying issues. The other issues could be litigated in a separate action. The Dissolvers filed suit in state court, asking the Court to dissolve the company due to deadlock.

Although the underlying issues could be litigated in a separate civil action, that was no salve for the Continuators. Civil litigation is costly and time consuming, and the Continuers wanted the Court to hear their arguments in the context of the dissolution claim, and they hoped that the Court in this case would enter an order not to dissolve the entity until it heard the claims. presented. by the Continue.

Unfortunately for the Continuers, they had no leeway to advance their arguments in a lawsuit filed to dissolve the company pursuant to the deadlock statute. The Court had read all the submissions and, applying the letter of the law, that the company could not continue its business due to the dispute between the four owner/operators, dissolved the company and ordered the distribution of its assets in accordance with liquidation procedures.

Now, what could have been done to remedy the situation? Certainly, any time there are an even number of parties and the same voting power, deadlock can occur, especially in cases where a unanimous vote is required for company action. In many cases, the impasse will not affect the operation of the business and can be resolved between the parties. However, in cases where one set of parties is more interested in terminating the relationship, the provision requiring unanimous vote as a predicate of corporate action can be used as a sword, rather than a shield; that is the situation described in this article.

This is why it is essential that voting arrangements within these entities are reviewed and drafted in a way that avoids deadlock. There may be clauses requiring a majority vote for certain issues, or supermajority votes for other issues, and in some cases, such as the dissolution of the company or the admission of another partner, the usual course is unanimous vote. However, if there is to be a unanimous consent vote provision, the language of the Agreement may be adapted to revise the provisions of the relevant state law regarding impasse, and the language may be inserted into the Agreement so that if it is need unanimous action, there will be no provisions that eliminate the dispute from the situations described in the relevant state deadlock statute. In the case described herein, the Dissolvers were able to start a new competing business, as their non-compete clause prohibited them from competing against the now dissolved limited liability company. An even number of partners can bring even results.