A while back I was at church and a young boy who was wearing a tie, seeing that I was also wearing a tie, approached me and told me to roll my tie up from the bottom until it was in a roll at the top of my shirt. He did the same. He then said we were going to have a race and that I should let go of my rolled up tie on three. He chuckled as he said, “one, two, three” and we both let go, our ties rolling back down to their proper place. The boy, with the biggest smile on his face, exclaimed, “It’s a tie!” I couldn’t help but laugh out loud at how funny this was to him.
There is another type of “tie” that is not so funny. It occurs when there are business partners who each own 50% of a business and they disagree as to how to proceed with certain business matters. Because each owns exactly half, unless they agree to compromise, they will always have a tie vote and will be deadlocked. This type of tie can be devastating and can lead to costly litigation (called a judicial dissolution in some states) between friends and partners.
The best time to deal with this type if tie, is at the outset, when you are setting up your partnership. I know it’s hard to imagine, but even best friends who are starting a business together will eventually disagree on how the business should be operated. The fact that you will disagree should be anticipated and the rules of how such disagreements will be resolved should be established and memorialized in the company’s organizational agreements. In an LLC the tie-breaking mechanisms could be in the Operating Agreement or in a Buy-Sell Agreement. In a stock company they could be in the Shareholder Agreement or By-laws.
Ties can be broken in any number of ways but it is important that the procedures be agreed to and clearly defined. Some alternatives include:
- Naming a third person that both agree to in advance to break the tie;
- Creating an ad hoc board of directors that reviews and makes decisions on issues the owners can’t agree upon;
- Agreeing that one of the owners is the managing partner and makes such decisions;
- Taking turns – each partner acts as managing partner for a specified period of time and then the other takes over for a specified period;
- Arbitration, using an agreed upon method of picking an independent arbitrator;
- If things become so bad that the parties want to break up, having established put/call – buy/sell language in which one party purchases the other. These can be tricky, but typically they provide that either party can make an offer to purchase the other at any time, for a specific price and specific terms. Once such an offer is made, the party receiving the offer may either sell for the price and terms offered, or they may buy out the offering party for the same price and terms;
- Flipping a coin.
If you are forming a company in which you will be a 50/50 owner with someone else, it is important to discuss these matters at the onset. If you would like assistance in drafting your partnership, LLC or corporations organizational documents with tie-breaking procedures, we are available to help.
If you are currently an owner of a 50/50 business and have not yet established tie-breaking procedures, it’s not too late, we have helped many established companies amend their agreements to provide for the resolution of ties.