Gaming
Avoid business dissolution by court order

Avoid business dissolution by court order

This is a problem that cost the parties of a business entity a lot of money, but could have been avoided if the underlying contract were written to provide a way out in the event of a desperate business stalemate. It could happen in the context of a joint venture between two entities, or it could happen in the context of four owners / operators of a business entity. Settlements can provide dispute resolution techniques, but the big elephant in the room, which no one thinks about, is that despite all the underlying issues, there are state statutes under which there may be a court-ordered dissolution of the business. .

If you are the general counsel for a company participating in a strategic partnership, take note. But I’ll describe the problem in the context of four owners of what was essentially a limited liability joint venture. After a few years, there were some disagreements, and the 4 owners / managers found themselves divided into two factions, one faction wanted to dissolve the business (the “Solvents”), the other faction wanted to continue the business (the “Continuators”). There was no non-competition agreement governing the parties to the business, which was a commercial enterprise. The underlying Agreement provided that all decisions would be made unanimously.

In some cases, the Solvents will use a ploy to dissolve themselves so that they can continue the business under a new name and obtain a business divorce from the others. In many cases, there is a non-compete clause contained in the original agreement, but sometimes that clause is not cleverly worded; the parties may not compete with the entity, but what about competing with each other?

So, despite issues such as breach of contract, breach of fiduciary duty, lack of good faith that encompassed the underlying dispute, one factor remained: there was a deadlock, and the Solvents made it known that under the terms of the State statute, the entity could dissolve, without a hearing on the underlying issues. The other issues could be litigated in a separate action. The Solvents filed a lawsuit in state court, asking the court to dissolve the company due to a deadlock.

Although the underlying issues could be litigated in a separate civil action, that was no balm for the Continuators. Civil litigation is costly and time-consuming, and the Continuators wanted the Court to hear their arguments in the context of the dissolution claim, and they expected the Court in this instance to rule not to dissolve the entity until it hears the claims made. by the Continuators.

Unfortunately for the Continuators, they had no leeway to initiate their arguments in a lawsuit filed to dissolve the company pursuant to the stalemate statute. The Court had read all the submissions, and applying the letter of the law, that the company could not continue its business due to the dispute between the four owner / operators, dissolved the company and ordered the distribution of its assets in accordance with with liquidation procedures.

Now, what could have been done to remedy the situation? Certainly, as long as there are an even number of parties and the same voting power, a deadlock or deadlock can occur, especially in cases where a unanimous vote is required for the company to act. In many cases, the deadlock will not affect the operation of the business and can be resolved between the parties. However, in cases where a group of parties is more interested in ending the relationship, the provision calling for a unanimous vote as a predicate of corporate action can be used as a sword, rather than a shield; that’s the situation described in this article.

That is why it is essential that voting agreements within these entities are reviewed and drafted in a way that avoids stalemate. There may be clauses that require a majority vote for certain issues, or a supermajority for other issues, and in some cases, such as the dissolution of the company or the admission of another partner, the usual course is the unanimous vote. However, if there is to be a unanimous consent voting provision, the Agreement language can be adapted to revise the relevant state statute provisions regarding deadlock, and language can be inserted into the Agreement so that if needs unanimous action, there will be provisions that eliminate the dispute of the situations described in the stalemate statute of the relevant State. In the case described in this document, the Solvents were able to start a new competitive business, as their non-competition clause prohibited them from competing against the now dissolved limited liability company. Even the number of partners can generate uneven results.

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