Though they are different structures, business partners and shareholders must create a plan to circumvent disputes. Whereas this blog focuses on the latter, neither group should rely on themselves. In other words, don’t assume that a preexisting relationship with your fellow shareholders is enough to overcome disagreement. There could be two people with equal shares in the company and half the seats on the board, or there could be multiple shareholders on opposite sides of a decision who hold equal shares.
Inaction prevents a company from growing or gaining traction. In any situation, you can do one of two things: Execute the right plan or execute the wrong plan. The only thing you cannot do is nothing. Why? Because failure is progress. When an initiative, campaign, or strategy doesn’t work, you are still left with new experiences and data. You can then formulate a new plan, pivot, and execute. The point is that you are always trying to take a step forward. You are deadlocked when shareholders are on opposite sides of a decision, and both are represented equally in voting power.
How Can It Be Resolved?
There are numerous ways to resolve a deadlock. There are scenarios where shareholders decide to step down or leave the company, or you may reach out and recruit new investors to add. In the absence of either, you resort to litigation to have a decision made for you. If you have read any of our guides or resources, you may already know that we don’t expressly advocate for any of these solutions. Preventing litigation is more manageable and (significantly) cheaper than pursuing a lawsuit. Shareholders need to know how to bypass or resolve a deadlock before it happens—and this can be achieved with a shareholder agreement.
The Value of a Shareholder’s Agreement
At Trembly Law Firm, we have been known to say that contracts are a way to predict the future. Will our shareholders ever become deadlocked while our company exists? No one can answer that. However, a well-written shareholder can tell you definitively how to resolve one—if it happens.
They can protect the shareholders’ rights by addressing how many shares will be issued, the cap table, the pre-emptive rights of the current shareholders, and what happens when there is a disruption. This could be a disagreement among the shareholders as easily as it could pertain to an untimely death. If one of your shareholders passes away, what happens to their shares? Does that ownership pass down to the shareholders’ heirs, or does the company have the opportunity to purchase them at fair market value? Furthermore, how will their value be determined?
Not having an answer to these questions is how disputes begin. Understandably, you cannot eliminate the possibility of conflicts, nor can you be 100% you will avoid being deadlocked. The shareholders’ agreement should have a clause about how to break 50/50 splits. There will be no need to agree to a solution because you’ve already done so by drafting a shareholders’ agreement when your business began.
You Can Turn To Trembly Law Firm
As always, you can mitigate but never eliminate the potential for litigation. Having an operating or shareholder agreement is critical. Meet and discuss your goals with our legal team, so we can help you create one that offers you the maximum amount of protection. When litigation is inevitable, we develop a custom approach based on your needs and goals and strive to resolve disputes quickly and cost-effectively. Contact our office to schedule a consultation with one of our qualified lawyers.