In a closely held corporation, a deadlock occurs when not enough voting power among the shareholders of the corporation can agree on a specific vote or issue. A closely held corporation’s bylaws may require a majority or supermajority vote of the outstanding stock or voting interest to approve a particular decision. However, when enough shareholders reject a specific proposal and the opposing side refuses to compromise, a closely held corporation may find itself in an intractable shareholder dispute. But what options do you have if you and your fellow shareholders cannot agree on a specific decision?
Common Causes of Deadlock
Shareholder deadlocks can occur more frequently in closely held corporations, as these businesses typically have fewer stockholders, making it more likely that shareholders will split evenly on a specific decision. Deadlocks can occur due to disagreements over the strategic direction of a business, how to manage the company’s finances (e.g., whether to issue dividends or retain profits, whether to initiate a capital call or take out a loan, etc.), or management decisions like whether to expand the number of the business’s storefronts. A deadlock can become more likely when a closely held corporation lacks a comprehensive dispute resolution mechanism in its governing documents that can help shareholders settle their disputes.
Initial Steps: Internal Resolution Strategies
When you have a deadlock with your fellow shareholders, some of the first steps you should take when pursuing a resolution of the dispute include:
- Review your company’s bylaws and shareholder agreements to understand voting procedures and potential dispute resolution procedures for deadlocks.
- If the company’s governance documents do not mandate dispute resolution procedures, you and your fellow shareholders may consider agreeing to mediation or non-binding arbitration to resolve the deadlock.
- Review whether your company’s governance documents impose other deadlock resolution procedures, such as buy-sell provisions or forced buyout clauses.
- Seek legal counsel to understand your rights and options.
Legal Remedies Available Under Michigan Law
Shareholders of a Michigan corporation caught in a deadlock over decision-making may pursue various remedies to resolve the impasse, such as:
- Judicial Dissolution – Shareholders can petition the Michigan courts for judicial dissolution of a corporation when the company’s directors or shareholders have become hopelessly deadlocked on one or more material issues and the corporation can no longer function effectively. A judicial dissolution winds down and terminates the corporation in accordance with state law.
- Court-Appointed Provisional Director or Custodian – Courts may appoint a neutral third party to serve as a provisional director to break a voting tie on the board of directors or to serve as a custodian to assume management of the corporation until the directors or shareholders can resolve their deadlock.
- Derivative Lawsuit – Shareholders may file a legal action on behalf of the corporation when a deadlock arises from a breach of fiduciary duties by directors to the company.
- Involuntary Buyout – Under certain circumstances, a court may order a shareholder to buy out dissenting shareholders or to sell their shares to the business’s other shareholders.
Preventing Future Deadlocks
Owners of closely held corporations can reduce the likelihood of deadlocks by drafting bylaws and shareholder agreements that include tie-breaking mechanisms or buy-sell provisions to resolve intractable disputes. Governing documents can also include dispute resolution provisions that require parties to mediate issues giving rise to deadlocks. Finally, shareholders might consider structuring the voting power of the shareholders or directors to avoid the possibility of deadlocks.
Contact a Corporate Attorney Today
When you and your business partners end up in a deadlock over strategic direction or corporate management, an experienced corporate law attorney can help you find a favorable solution to the dispute and protect your interests. Contact August Law, PLLC, today for a confidential consultation to discuss your legal options during a deadlock in your Michigan closely held corporation.