How to Avoid Deadlocks in Your LLC
Do You Have Voting Rights in Your LLC?
If you’re a Member of a limited liability company (an "LLC"), you probably have voting rights. If you’re not sure, check the Operating Agreement. If you have an Operating Agreement, it will lay out how voting works and what percentage of votes are needed to reach a decision.
If you don’t have one, congrats! You probably do have voting rights (although boo on not having an Operating Agreement. That’s basic corporate hygiene.)
What is a Deadlock?
If it is possible for a vote of the members in your LLC to be split 50-50 or end a plurality (meaning no option, even the option with the most votes, received more than 50%), you should be concerned about Deadlocks. A Deadlock is basically a tie. If a simple majority (51%) is needed to make a decision, a 50-50 tie or a plurality can shut down your whole operation (i.e. your LLC). If the Deadlock cannot be resolved by a vote, you could realistically end up having to sue your business partner and get a court involved to decide.
How Does an Operating Agreement Can Avoid Deadlocks?
If a Deadlock in your LLC is possible based on how decision-making authority is spread out amongst its members, an Operating Agreement can provide mechanisms for breaking it. It does this by providing dispute resolution mechanisms, which must be performed before a court gets involved.
Here are a few your Operating Agreement could include:
A 51% Owner: It avoids a Deadlock because what the 51% owner says goes. If you believe there are some issues in which more than a 51% majority should be required to make a decision (i.e. a supermajority), list those issues and the required percentage for approval in your Operating Agreement. But don’t get too carried away, lest you defeat the purpose of having a final decision maker
Preplanned Exits. If you have a Buy-Sell Agreement, a Deadlock can be a triggering provision, which leads to the sale of a Members interest to another Member of the LLC. It avoid a Deadlock because the Member that acquired the departing Member's interest will have over 51% of the votes needed to act, which resolves the Deadlock.
Tie-Breakers. There are all kinds of tiebreakers you can include in an Operating Agreement. For example, you can create appoint one or many mutually agreed-upon third parties to serve as an Advisors. If a Deadlock has formed and needs to be resolved, these Advisors would cast the deciding vote. If you're short an people who could serve as Advisors, you could also flip a coin (no, really, you could.)
Rotating Votes. The members of the LLC get cast the tie breaking vote one-at-a-time on a rotating basis. Be sure to keep track of when the Rotating Vote is used, what is was used on, who it was transferred to, and the order of the rotation.
Alternative Dispute Resolution. Alternative Dispute Resolution refers to processes like mediation and arbitration, which are quicker and more affordable than litigation, but are still legal proceedings with a sense of formality and decorum.
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