Deadlocks in closely held corporations can create significant challenges. This process is especially difficult when key stakeholders disagree on critical decisions. While litigation is one way to resolve these disputes, it can be costly and time-consuming.
However, there are strategies that can help resolve deadlocks without turning to the courts. Understanding these best practices is essential for solving these issues equitably.
Establishing clear decision-making procedures
One of the most effective ways to prevent or resolve deadlocks is by having well-defined decision-making procedures in place. These should be in the corporation’s bylaws or shareholder agreements. These decision-making procedures should address how to handle disputes before they escalate.
Implementing tie-breaking mechanisms, such as designating a neutral third party to cast a deciding vote, can help break deadlocks. In some cases, weighted voting can help. Granting certain stakeholders more voting power can often prevent deadlocks. This is particularly useful when one individual holds a majority of shares or has a key role.
Mediation and arbitration
Mediation and arbitration offer non-litigious ways to resolve disputes in closely held corporations. Both methods provide a neutral forum for discussing issues. This allows parties to reach an agreement without involving the court system. In arbitration, a neutral arbitrator listens to both sides and makes a binding decision. This provides a quicker resolution than litigation.
Buy-sell agreements
A buy-sell agreement can also help resolve deadlocks. This agreement allows one party to buy out the other in the event of an impasse. This type of agreement, set up in advance, outlines the conditions under which a shareholder can sell their shares. It also establishes a process for determining the value of those shares. This ensures that the buyout process is fair and transparent.
Building a foundation for long-term success
In business litigation, resolving deadlocks in closely held corporations requires more than just a quick fix. It involves creating a foundation for long-term success. It also fosters a healthier corporate environment that can withstand future disagreements.
