What Happens When LLC Members Deadlock Over A Business Decision?
A limited liability company (LLC) provides a flexible mechanism for one or more people to form a business with protection from personal liability for business debts. Unlike a corporation, where shareholders often play no role in the day-to-day management of the business, an LLC may be structured so as to give the individual owners (known as “members”) direct control over management.
Of course, this can pose some challenges as well. For example, what if you have four members in an LLC and there is a 2-2 deadlock over an important business decision? Every LLC should have an operating agreement, which is a contract between the members, to detail how issues of governance should be handled. But even then, if the operating agreement requires a majority vote of the membership, what is the remedy for a deadlock?
Options for Resolving a Deadlock (Without Going to Court)
Again, a well-drafted operating agreement should anticipate and provide for such contingencies. Here are a few examples of mechanisms for breaking a deadlock between LLC members:
- Tie-breaking vote – Perhaps the most direct way of resolving a deadlock is to give one member a tie-breaking vote. This is often more complicated than it sounds, however, as that can create a great deal of friction among the members. It can also be difficult to determine when a deadlock is so entrenched as to justify using a tie-breaking vote.
- Third-party tie-breakers – Another approach is to designate some outside group or body to resolve a membership deadlock. For example, the LLC could agree to retain an outside professional adviser to act as a tie-breaker should the need arise. Or to go a more formal route, the operating agreement could require third-party mediation or arbitration in the event of a deadlock.
- Buy-sell provision – The operating agreement may also contain language permitting resolution of a deadlock by allowing one member (or perhaps a group of members) to offer to buy out the other side. The other party can then either sell their membership interest or purchase the offeror’s interest for the same terms. Alternatively, the agreement can require the parties to hire an outside appraiser to value the business as a first step towards a buyout.
What If Nothing Else Works?
If for whatever reason there is no practical way to resolve a membership deadlock, any of the members can file a lawsuit seeking a judicial dissolution of the LLC on the grounds that the members are deadlocked to the point where the business is suffering. The court can take a number of actions, including forcing the dissolution of the LLC, appointing a receiver for the business, or even forcing the expulsion of a member to break the deadlock.
If you are involved in such a situation and need legal advice from a qualified Tampa business disputes lawyer, contact HD Law Partners today to schedule a consultation with a member of our team. Call us at 813-964-7878 or visit us online at https://www.hdlawpartners.com/contact-us/