IMO – This Company Is Getting Bad Advice!
March 24, 2010
Recently, I recommended a corporation, owned equally (50%-50%) by a husband and wife add a “deadlock” provision to its policies. (A deadlock provision is a policy that says when equal “partners” in a venture disagree, there needs to be someone, controlling or voting, a small portion of the equity, who can “break” a deadlock when the two just can’t agree.) The company attorney told them, “strangers owning 50% each, will have such a clause.” He went on to say “equitable distribution would be determined (business dissolution or distribution) under State Law.”
What’s wrong with this thinking – and let’s take it point by point?
1. STRANGERS – Strangers shouldn’t be in business together. But let’s talk about friends, unrelated parties. If they have a dispute and can’t agree, shouldn’t they have someone who can break their deadlock? I once had a client, an INC Magazine “500” company that went bankrupt because their attorney didn’t put a deadlock provision in their policies and by the time I got there, things were so tenuous, they wouldn’t adopt one. That company is no more. I believe every company where a deadlock COULD happen, needs a deadlock provision.
2. STATE LAW WILL PREVAIL – Anyone who’s been divorced knows that breaking up is both hard to do, usually generates hard feelings and takes time – sometimes lots of time. Furthermore, equitable distribution only deals with a division of assets, not with the ongoing running of a business. Either owner can sabotage a business in the time it takes to get to equitable distribution – by gutting the cash, by interfering in transactions, in venting anger in the workplace. By the time you get to equitable distribution, sometimes the business isn’t worth much anymore. Divorce should never be one of your exit strategies. A deadlock provision can help avoid this. Supported by pre-established guidelines, the person voting the minority position, can help break the deadlock and keep the business alive.
3. WE’VE BEEN MARRIED A LONG TIME – Is wonderful news and I applaud long-term, happy, marriages. I also know that in first, second and third marriages, of whatever duration, the chances of staying together until one partner dies is typically never more than 50%. If you can’t rely on something happening, you manage the risk – with a deadlock provision – a cheap and easy safeguard just in case. (a clause like this can also be helpful in cases of mental disability that is not readily diagnosed, the third person voting the minority position, can help save the company by inserting objective, common sense.)
We normally buy health, auto and life insurance. We usually look both ways before crossing the street. In a 50-50 business “partnership,” a little prevention can save a great deal of pain.
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