A Proposed Law Drafted In Legal Language Is Called A Avoiding Court Ordered Dissolution of Business

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Avoiding Court Ordered Dissolution of Business

This is costly to the parties to the business entity, but could have been avoided if the underlying contract had been drafted to provide a way out in the event of a hopeless business impasse. This may occur in the context of a joint venture partnership between two businesses, or it may occur in the context of four owner/operators of a business entity. Contracts may provide methods for resolving disputes, but the big elephant in the room that no one seems to think about is that, despite all the major issues, there are state laws that allow businesses to be wound up by court order.

If you are the general counsel of a company participating in a strategic partnership, please note. But I will describe the problem in the context of four owners of a limited liability company, which is essentially a joint venture. After a few years, some disagreements arose and the 4 owner/managers split themselves into two factions, one faction wanting to liquidate the business (the “Leavers”), the other faction wanting to keep the business going (“Continuators”). ). There was no non-compete agreement governing the business side of the trading firm. The Basic Agreement provided for all decisions to be taken unanimously.

In some cases, Dissolvers will use a ruse to continue the business under a new name and dissolve in order to obtain business divorces from others. In many cases, the original contract contains a non-competition clause, but sometimes the clause is not drafted; parties may not compete with the organization, but what about competing with each other?

Thus, despite the issues of breach of contract, breach of fiduciary duty, and bad faith surrounding the underlying dispute, one factor remained: the deadlock had reached an impasse, and the liquidators could be dissolved without a hearing on the underlying issues under the terms of the State statute. Other issues can be discussed in a separate process. The Dissolvers filed suit in state court, asking the Court to dissolve the company because it was insolvent.

Although the underlying issues could be litigated in a separate civil action, this was no balm for the Proceeds. Civil litigation is expensive and time-consuming, and the Defendants wanted the Court to hear their arguments in the context of the winding-up action and hoped that the Court would order the institution not to wind up pending the hearing of the claims in this instance. By the attendees.

Unfortunately for the Continuers, there was no way to turn their argument into a suit to wind up the company under the impasse statute. The court read all the submissions and, applying the letter of the law, found the company unviable due to a dispute between the four owner/operators and ordered that its assets be distributed accordingly. with cancellation procedures.

What could be done to correct the situation now? Of course, deadlocks or deadlocks can occur at any time when there is an equal number of parties and equal voting power, especially where a unanimous vote is required for the company to operate. In many cases, the impasse will not affect the operation of the business and can be resolved between the parties. However, in cases where one group of parties has the greatest interest in terminating the relationship, a provision requiring unanimous voting as a predicate for corporate action may be used as a sword rather than a shield; This is the situation described in this article.

Therefore, voting agreements within these entities should be reviewed and designed to avoid impasse. There may be clauses requiring a majority for certain matters or a supermajority for other matters, and in some cases, such as the dissolution of a company or the admission of another partner, the normal course is a unanimous vote. However, if unanimous consent is to be a voting provision, the language of the Agreement may be adapted to review the deadlock provisions of the applicable State law, and language may be included in the Agreement that, if unanimous action is required, it will contain provisions that exclude the Dispute from the circumstances described in the applicable State deadlock statute. . In the example described here, the Dissolvers were then able to start a new competing business because their non-compete clause prohibited them from competing with the now-dissolved limited liability company. Even the number of partners can produce uneven results.

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