Health & Fitness
Breaking Deadlocks When Business Owners Fight
How does one break a deadlock when there are two owners of a business -- each with equal ownership?
Business decisions based on majority vote work well unless there are but two owners of the business – each with equal ownership – and the two owners are at loggerheads.
How does one break the deadlock?
Ideally, either a Shareholder Agreement (corporation), a Member Control Agreement (limited liability company (LLC)), or a separate Buy-Sell Agreement contains provisions for breaking an impasse between equal owners.
If no process for dealing with deadlocks is established ahead of time, then the business may languish – a poor way of handling the conflict.
One method of breaking a deadlock is the so-called “shotgun clause” or “gauntlet provision”. Under this provision, the deadlock is broken because one owner ends up buying out the other owner.
Basically, it works this way: Owner A offers to buy out Owner B’s shares at price $XX. Owner B can accept that price, and let Owner A own all of the business. Or, Owner B can instead force Owner A to sell out to Owner B at the same price $XX.
Essentially, the owner who starts the process controls the price, while the other owner controls who ends up with the business.
The theory is that because the price can be turned around and used against Owner A, Owner A tends to offer a fair price to Owner B at the outset. Theory doesn’t always work perfectly in practice.
If Owner A is significantly wealthier than Owner B, Owner A could offer a somewhat low price to Owner B because Owner A may know that Owner B can’t afford to switch roles and buy out Owner A even at the said low price.
Of course, if the wealth gap is known at the beginning, the deadlock provision contained in the Buy-Sell Agreement detailing the relationship between the two owners could provide that the wealthier owner has to pay cash up front, but that the poorer owner could pay over time.
An attorney should be consulted to work out a fair deadlock provision between the two owners.
©2013 Wittenburg Law Office, PLLC. All rights reserved.
Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.
Bonnie Wittenburg, Wittenburg Law Office, PLLC, Minnetonka, MN 952-649-9771 www.bwittenburglaw.com bonnie@bwittenburglaw.com
