What is a deadlock provision?
Deadlock provisions are often overlooked in the drafting of operating agreements. A deadlock provision is a procedure for resolving disputes and tied votes when the is no majority, such as when you have a two (2) member limited liability company. Without the proactive procedures in a company’s operating documents to break the deadlock, the members and/or managers are left with the potential judicial dissolution of the company as prescribed by Florida Statute 605.0702(b)(5).
Florida Statute 605.0702(b)(5) The managers or the members of the limited liability company are deadlocked in the management of the limited liability company’s activities and affairs, the members are unable to break the deadlock, and irreparable injury to the limited liability company is threatened or being suffered.
Even if the deadlock doesn’t result in dissolution, the discord and costly litigation can impede a business’ operations and affect profitability.
Mechanisms to Prevent Deadlock
A deadlock breaker can prevent disagreement between the members/owners of the company escalating to a “game over” scenario for the business. Below are popular mechanisms for breaking a deadlock that can be built into the company’s operating agreement:
- Tiebreakers: The parties can name a specific professional or person who knows the company to cast their vote to break the tie. Alternatively, the parties could agree to a mediator or arbitrator making the decision. The best practice is to name a particular person by name to avoid disagreement about who the tiebreaker will be or identify the professional that shall be the designated tiebreaker, such as the accountant or attorney for the company.
- Buy-Sell Provisions: This provision allows for the members/officers/owners to buy out the interest of the party who is at odds for an appraised value or the set price and terms set forth in the agreement.
- Casting Vote: The role of tiebreaker rotates between the parties. An example would be that each member in a member-managed limited liability company has the opportunity to opt to be the tiebreaker on a deadlocked issue, and the next deadlock will be a different member. This option is likely the least popular avenue for breaking a deadlock since there is an element of rotating who is the disgruntled party.
- Forced Partition or Sale of the Company or its Assets: A provision that mandates an immediate sale of the business should an unresolvable deadlock occur.
Hiring an experienced business attorney to draft a company’s operating documents is very important. Take the time to plan and think about the structure of the company, take into account the operations and purpose, and the potential issues that may arise that your operating documents should address. With so much time and money invested in a business, it is wise to have an agreement that lays out the rules, procedures, and solutions that will allow the company to succeed.
