Owning a business with a partner can be exhilarating, especially in its early stages, but disagreements between owners can swiftly transform excitement into stress. This challenge becomes particularly pronounced in closely held businesses like LLCs, where two equal owners share the reins. In such cases, having deadlock provisions in key agreements, such as LLC operating agreements, bylaws, or buy-sell agreements, becomes imperative.
Understanding Deadlock Provisions:
Deadlock provisions within agreements outline the course of action when members face an impasse, preventing them from making crucial decisions. These impasses often arise in matters such as the business’s direction or profit allocation. These provisions may include steps for resolution, like mediation or arbitration, or protocols for LLC dissolution if the deadlock persists. Additionally, they may encompass procedures for buying out a member’s interests or, in extreme cases, removing a member causing the deadlock.
Real-life Examples Emphasize Importance:
Two recent legal cases, In re: Dissolution of Doehler Dry Ingredient Solutions, LLC, and James H.Q. Davis Trust vs. JHD Properties, LLC, underscore the critical need for well-crafted deadlock provisions in operating agreements or bylaws when multiple owners, investors, or members are involved.
- In the first case, the court denied a request for judicial dissolution due to a buyout option in the LLC operating agreement. This option allowed any member to propose a purchase price for units in case of a deadlock, providing a mechanism for resolution without resorting to dissolution.
- In the second case, a court rejected a motion to dismiss a request for judicial dissolution. The disagreement between two LLC managers on the management of undeveloped land highlighted the absence of mechanisms in the operating agreements to break the deadlock. This absence ultimately led to a situation where conducting business in line with the agreements became impractical.
Crafting Custom Deadlock Provisions:
These cases stress the importance of customized, clear, and well-thought-out deadlock provisions in LLC agreements. The absence of such provisions can be the difference between a thriving business and one entangled in legal disputes. When creating an LLC agreement, thorough consideration of conflict resolution and exit strategies is vital. Buyout provisions should meticulously outline methods for determining buyout prices, specifying payment terms, and conditions under which a buyout may occur.
For multi-member entities, having custom-drafted agreements is crucial to avoid undesirable outcomes, especially concerning exit strategies. Collaborating with a Family Wealth and Estate Attorney with expertise in business planning, like us at MC Bell Law Firm, ensures comprehensive protection for you and your business partners, both in the present and the future.
This article is presented by Michelle Bell, an expert in estate planning and business succession services. Our office provides comprehensive legal support for businesses, assisting you in making informed decisions throughout your entrepreneurial journey and in planning for future contingencies. We also offer a specialized session where we review your business’s legal structures. To arrange this consultation, please click the following link: https://calendly.com/mcblawpllc/30min.
The information in this article is intended purely for educational and informational use and should not be considered as advice on ERISA, tax, legal, or investment matters. For advice specifically tailored to your unique situation, such advice should be sought independently from this educational content.