Articles Tagged with director deadlock

  • New York’s BCL requires at least 50 percent of shares to petition for dissolution based on deadlock, unless there has been a failure to elect directors.

  •  The fact that a shareholders agreement required the election of two deadlocked directors was not a basis to waive the statutory requirement.

  • Parties avoid claims of wrongdoing and oppressed shareholder action that could trigger mandatory sale of minority interest.


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Judicial Dissolution Petition Requires 50 Percent Shareholder

A minority shareholder in New York will have a difficult time pursuing a claim for dissolution because of a deadlocked board of directors or a deadlock among the shareholders.  New York law permits a cause of action for judicial dissolution based on deadlock, but only by shareholders with holdings of 50 percent or greater, unless the shareholders are unable to elect directors.

The statute can be harsh in its application, as demonstrated by a trial judge’s decision to dismiss a petition for dissolution under BCL § 1104, the provision of the New York Business Corporations Law that creates a statutory cause of action for judicial dissolution. (We discuss the issue of deadlock in more detail in our series on the topic, here and here.) Continue reading

  • Courts use their authority to appoint a custodian to take control of a closely held corporation as a remedy to deadlocked directors or shareholders.
  • A showing of serious or irreparable harm is required before a court will intervene in a deadlock among shareholders or directors; more than dissension is required.
  • A court may direct a custodian to dissolve and liquidate a corporation, or sell the entire business as a going concern, in the best interest of the shareholders and other constituencies like employees.

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Appointing a custodian or receiver of a closely held corporation is a recognized remedy when the owners are deadlocked.  Once appointed, the custodian or receiver may be given wide authority to break the deadlock, to manage, to sell or dissolve the corporation — including cases in which the remedy seems to go beyond what is provided in the statute.


A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships


A bitter business divorce between two former college sweethearts provided the background for the Delaware Supreme Court’s analysis of the circumstances in which it could provide a dissolution-like remedy and order the sale of a large successful business.

INTERVIEW

The decision of the Delaware Chancery Court, Shawe v. Elting, involved Transperfect Global, Inc., a corporation formed by Elizabeth Elting and Philip Shawe in 1992 while the pair lived together in a New York University dorm room.  The two became the co-CEOs, sole directors and equal owners of a company that provided a variety of translation services from locations around the globe, generating $80 million in profits in 2014. (Shaw later transferred 1 percent to his mother, but she remained firmly in his camp, which caused the deadlock to continue.) Continue reading

  • Deadlock is more than an inability to make a decision.  It is an inability to act under circumstances that present the real threat of harm to the business.
  • Deadlock is triggered by the shareholders’ inability to elect directors.
  • When there are no alternatives to prevent harm to the business, like a buy-sell agreement, a Court is likely to find that the shareholders or directors are deadlocked.

For the closely held corporation, deadlock may be the result of a dispute among the shareholders, or among the directors in circumstances that the shareholders cannot fix by electing new directors.  Whether a court is asked to find deadlock under an applicable corporations statute or as part of a common-law remedy, deadlock is rarely found in circumstances in which there is no threat of significant or irreparable harm.

In this article, we will consider some of the circumstance in which courts have been asked to declare that a deadlock exists among the directors and/or shareholders of a corporation – often in a closely held corporation they are one and the same – and to fashion a remedy.  Most often the principal remedy in theINTERVIEW case of a “true deadlock” is the dissolution of the corporation, which entails the liquidation of the entity.  Courts rarely impose such an extreme remedy on a viable business entity, so such remedies as the sale of a minority interest, sale of the entity as a going concern or other types of injunctive relief are far more common.


A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships


Corporations statues vary in the statutory remedy for deadlock or oppression.  The Model Business Corporations Act (MBCA), on which many state corporations codes are modeled, provides for the judicial dissolution of a corporation when the shareholders are unable to elect directors or when the directors are deadlocked in the management of corporate affairs; the shareholders cannot break the deadlock; and there is either the potential for irreparable harm to the corporation, or the “business and affairs of the corporation” cannot be conducted to the advantage of the shareholders.  MCBA § 14.30. The model act also provides a court with broad powers to appoint a custodian to manage and/or wind up the affairs of the corporation.  MCBA §§ 7.48; 14.32. Continue reading

  • Deadlock is the inability of the owners of a business to make critical decisions, a paralysis of the management of closely held corporation, limited liability company or partnership.
  • The inability to maintain normal operations is a characteristic of a deadlocked business.

  • Courts will intervene to prevent harm to a deadlocked coproation, LLC or partnership, typically when one of the owners petitions to dissolve the business.


INTERVIEWDeadlock occurs when the owners of a closely held business, be it a close corporation, partnership or limited liability company, are unable to reach a decision on some matter involving the business. Because deadlock is typically associated with businesses in which most or all of the owners participate directly in management, they are characterized by emotions, self-interest and not always rational.


A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships


In the simplest case, two 50/50 owners are unable to come to some decision that is critical to the business, for example whether to provide additional capital or give personal guarantees to a lender. Because the ownership is equally shared, the principals have to govern by consensus, or not at all.  This is true whether it is a corporation, limited liability company or partnership. Continue reading

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