How Do We Handle Deadlocks in a 50/50 Partnership?

 If you didn’t have the foresight to include tie-breaking mechanisms in your organizational documents, there are not a lot of options.   If both partners are reasonable, an accommodation acceptable to both can often be worked out.  Perhaps the partners can agree to appoint an impartial arbitrator or panel, and to be bound by the decision of the arbitrator or panel.  Or perhaps one partner agrees to buy out the other partner.  But on those occasions when a compromise or method of resolution cannot be worked out, a judicial dissolution may be necessary.  In a judicial dissolution, one of the partners petitions the court to divide the assets and business between the partners in some equitable manner.  Unless the business has multiple independent divisions that can be easily separated, such dissolution can have a disastrous effect on the business.   

It is inevitable that 50/50 partners will eventually disagree on the direction, the scope or the details of operating their business.  It is not possible to avoid every dispute.  But it is possible with carefully drafted organizational documents to make resolution of such disputes less costly and time-consuming.  There are many different types of tie-breaking mechanisms that can be adopted.  The partnership agreement might provide for: (a) a third person to break ties; (b) a board with an odd number of directors to decide disputes; (c) arbitration to be handled by one or more arbitrators; (d) one of the partners to be the managing partner and have final say; (e) flipping a coin to make the final decision; or (f) whatever else the partners can agree on.

Deadlocks also arise between Shareholders of corporations, or between Members of limited liability companies.  In a corporation, tie-breaking mechanisms could be included in the Code of Regulations, shareholder agreement, buy-sell agreement or close corporation agreement.  In a limited liability company, tie-breaking mechanisms could be included in the Operating Agreement or other membership agreement.  The important thing is to adopt tie-breaking mechanisms before a deadlock occurs.   

If you would like assistance drafting tie-breaking mechanisms for a partnership, LLC or corporation, let me know.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  The definition of “accredited investor” was recently changed by the Frank-Dodd Act.  If you are trying to raise capital by selling shares to investors, you can avoid a lot of risk and make security law compliance easier, if you only sell to accredited investors.  One of the factors used to determine accredited investor status is net worth.  For this purpose, net worth now excludes the value of the investor’s personal residence.  If you want to discuss raising capital by doing a private offering, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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