By Lori DaCosse (bio)
Problem:
Two clients are engaging in a new business enterprise: both are providing capital and substantive know-how. The principals desire to form a limited liability company where each client has a fifty percent (50%) ownership stake and corporate governance is by majority vote. Given the early stage and speculative nature of the venture, stalemate was a legitimate possibility resulting in compromised day-to-day operations.
Solution:
We recommended that the client insert a deadlock provision where each owner consented to appointment of the Company’s Certified Public Accountant to resolve any financial deadlocks and a mutually respected marketing expert to resolve any operational issues (the limited liability company was a marketing entity) in the event of deadlock. These experts agreed in advance to serve in these roles if needed and the operating agreement provided they would be compensated for their efforts and render decisions on disputes expediently. This deadlock structure was proposed in lieu of more sophisticated provisions that provide for arbitration of deadlocks due to the limited budget of the client’s new entity and the concern that an early operational deadlock could destroy their business.
Result:
The client preemptively addressed items that could otherwise result in operational deadlock and undermine their new business endeavor in a manner that was cost-effective and efficient.
Lessons Learned:
Deadlock provisions must be a part of any corporate organizational documents to prevent stalemate. However, the nature of the provision needs to be crafted to the objectives and budget of each entity and its principals. Those entities with a limited budget may not have the financial wherewithal to engage in lengthy arbitration processes that are otherwise commonplace in more sophisticated or well-capitalized entities.
