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Deadlock in a limited liability company or partnership occurs when the members can no longer pursue the purpose of the business as agreed in an operating agreement or partnership agreement.
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A ‘minority veto’ occurs when a minority member or partner uses the unanimity requirement to block the will of majority.
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Actions outside the ordinary course of business are likely to require unanimous consent, including the admission of a new member or partner, amendment to the operating or partnership agreement, a merger or sale of substantially all of the business’ assets.
Deadlock among the members of a limited liability company, or among the partners in a general partnership, involves the inability of the company to make decisions that are material to the continued operation of the business. It is not an infrequent occurrence. The direct participation of the owners in the day-to-day affairs of the LLC or partnership and the requirement that — in most circumstances — the most important decisions require a unanimous vote make it important that an LLC or partnership is able to reach consensus on the most important decisions.
A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships
Because LLCs and partnerships are unincorporated business associations, they are typically quite different in structure than a traditional corporation. And while deadlock among the members of a limited liability company or partnership involves many of the same principles that one finds in the closely held corporation, there are significant differences as well.
In this article, we look at some of the differences between deadlock in corporations, which are generally governed by statute, and deadlock in unincorporated business associations (primarily partnerships and limited liability companies), which are governed primarily by principles of contract. In many cases, the results are not very different, but there are some key distinctions.
In later posts, I will examine some of the circumstances in which the courts have been asked to resolve deadlock disputes through lawsuits seeking involuntary dissolution actions or the expulsion of a member or partner.
Deadlock Occurs When Contracts Fail
Unlike a corporation, which conceptually is a creature of statute, deadlock in a partnership or limited liability company usually does not involve any specific statutory provision that is intended to address the problem of deadlock. In fact, neither the Revised Uniform Limited Liability Company Act (RULLCA) nor the Revised Uniform Partnership Act (RUPA) specifically mention deadlock. Rather, because the limited liability company and partnership are fundamentally creatures of contract, the focus is not on the statutory criteria but the nature and scope of the express and implied agreements that exist between the owners.
A retiring member of a limited liability company was unable to convince a trial judge that the parties had amended the operating agreement through their course of conduct to adopt a new valuation approach.
The decision of controlling shareholders that a corporation will not pay dividends to a former employee and director is subject to the business judgment rule, in this case defeating the shareholder’s claim of oppressive conduct by the majority.
A venture capital company and the independent manager of a limited liability company were permitted to correct a questionable vote and use a written consent to terminate one of the founders as manager of a group of holding companies.
No one gets married expecting to get divorced. And no one forms a business expecting that it will fall apart. Just as people get divorced, many businesses come to the point at which a business divorce is the best alternative because the partners cannot, or will not, continue to work together. When that happens, the parties need to restructure, and often separate, their business interests.
The dismissal of a judicial dissolution claim brought by an LLC member seeking to dissolve the family business demonstrates the difficulty that an oppressed minority LLC member faces under New York law.
A Delaware chancery judge drew a liberal comparison between a venture capital fund organized as a limited liability company and a limited partnership in holding that a member that had been forced out was entitled to fair value rather than the value of his capital account. The result was that his buyout increased by some fivefold, but not for the reasons advanced by the departing member.
