Deadlocks Between Owners Of Corporations And Limited Liability Companies
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 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.
Important Tip There is often a lot of optimism at the time of starting a business among the business partners. Despite the optimism, it is a good idea to think through what happens if disputes arise down the road. Preparing for these disputes can help a business get off to a better start.