Family Business Owners Should Be Aware Of Statutory “Deadlock” Provisions
Many family businesses run smoothly for years, until the business is sold or passed on to the next generation(s). There are, however, those circumstances where the family or closely-held business runs into a deadlock among management where the parties are unable to agree on a course of action to move the business forward. In these circumstances, one party can petition the appropriate court for a judicial dissolution of the business. The other party may be opposed to this prospect, but can do little other than defend the claim or try to work out a solution with the party filing suit. Owners of family or closely-held businesses should be familiar with the applicable judicial dissolution standards and should try to include language in a shareholder agreement or operating agreement to avoid this problem, especially where management and stockholdings are divided 50/50. An ongoing deadlock can be severely damaging to a business, taking time, attention and funding away from other matters.
In a recent Delaware case, Benjamin Feldman v. YIDL Trust, C.A. No. 2017-0253-AGB (Del. Ch. November 7, 2017), the Delaware Chancery Court granted summary judgment to the party requesting dissolution over the objections of the other party, who wanted to keep the company intact. Feldman involved a suit filed by a grandson against his grandparents to dissolve the company and sell its only asset (a boat). As ownership and management were both deadlocked, the court had no choice but to order the dissolution of the company and the sale of the underlying asset.
Courts in Massachusetts have considered these issues as well in both the corporate and limited liability company contexts. In Koshy v. Sachdev, No. SJC-1222 (September 14, 2017), the Massachusetts Supreme Judicial Court considered for the first time the meaning of G.L. c. 156D, §14.30, the section of the Massachusetts corporation statute dealing with involuntary dissolution. In finding in favor of the party seeking dissolution of the business, the SJC found that a “true deadlock” existed that was likely to cause irreparable harm to the business. The language in the Massachusetts limited liability company statute regarding involuntary dissolution sets forth a similar standard for parties seeking dissolution as well, providing: “On application by or for a member or manager the superior court department of the trial court may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on its business in conformity with the certificate of organization or the operating agreement.”
Parties to a shareholder agreement, operating agreement or other documents governing the management of a business should be aware of these concerns, especially where the business is divided 50/50. Without specific language written into such agreements, courts are unlikely to infer a “waiver” of the potential dissolution remedy, so it is very important for the parties to agree upfront on what they want done (including possibly waiving the right of judicial dissolution).
Parties may want to consider provisions that require mediation, expedited arbitration, or appointing a “provisional” director or manager who will resolve disputes in order to avoid deadlock.
If the parties are unable or unwilling to consider these types of alternatives, it may make sense to include mandatory buy-sell provisions in the agreement. There are many different options available to business owners, such as provisions where each party submits sealed bids and requiring the high bidder to buy the other party out, or where the low bidder must sell to the other party. Drafters also sometimes incorporate a “shotgun” provision, where one party makes an offer and the other part must either sell at that price, or buy the other part out at that price. There are many options available to business owners, but it is important to get them into the original agreements to avoid going down the road of judicial dissolution.