Resolving Small-business Disputes: The 50-50 Deadlock

On occasion when I help a client form a new corporation or limited liability company (LLC), the company will have two owners, each owning 50% of the company.

A major risk with 50-50 ownership is that disagreement on an important issue can deadlock the company. In an extreme situation, the dispute might even put the company out of business!

Accordingly, a well-drafted formation document – a shareholder agreement or LLC operating agreement – will anticipate this risk and provide one or more ways to resolve or work around the problem. Here are some examples:

• A requirement that disputes be submitted initially to mediation, which is particularly appropriate where the parties are more interested in resolving the issue and continuing to work together than in determining who is right and who is wrong. The mediator might be a trusted, neutral third party or a commercial mediation service provider.
• If mediation does not work, the opportunity for either owner to request (or alternatively, a requirement) that the dispute be submitted to binding arbitration. One downside of arbitration is that it may be less helpful if the dispute concerns business judgment rather than a legal issue.
• Absent resolution by one of the foregoing means, a procedure by which one owner may buy out or sell to the other.

Sample language for each of these approaches is included in “Sample Mediation, Arbitration and Buyout Provisions” on the Downloads page.

Related post: How to Kill Your Company when that’s the Only Choice

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.