One of the most common small business situations we encounter is dealing with conflicts, or "deadlocks," among stockholders or a corporation or members of a limited liability company.
These are particularly difficult situations, especially when there is not an effective operating agreement or shareholders agreement providing for the resolution of deadlocks.
One draconian remedy is available through the courts. Courts often require at least three items before getting involved. These three items are:
- There is such dissension among the stockholder/members, directors or officers that the company cannot successfully carry on its functions.
- The imminent danger of loss of assets is threatened.
- No other remedy appears to be adequate.
In these cases, the court can appoint a receiver to protect the interests of the company and its owners.
In setting up a company with equal members where a deadlock is possible, the owners should consider a number of common provisions for dealing with deadlocks. These provisions include:
- Mediation. Mediation allows the owners to meet, usually with a trained mediator, to try to come to a resolution.
- Arbitration. Arbitration allows a neutral third party to make a decision. This is a difficult option for business issues because there are often not right or wrong decisions involved in business disputes.
- Russian roulette. A russian roulette provision requires one of the owners to serve a notice on the other party naming a price at which it values an interest in the company. The owner receiving the notice has the option to buy the other owner's share or sell its share to the other owner at that price.
- Texas shoot-out. Each owner sends a sealed bid to a third party setting a price at which they are willing to buy out the other owner. When the bids are opened, the owner with the highest bid can purchase the other owner's share in the business at that price.
- Dutch auction. Like the Texas shoot-out, each owner submits the minimum price at which he or she will sell their share in the company. The owner with the higher bid then has the option to purchase the other owner's share at the price in such other owner's bid.
By thinking ahead and including provisions like these, owners often have more incentive to resolve their disputes before triggering one of these types of provisions.