New Hampshire lawyer John Cunningham eats, sleeps and breathes limited liability companies.
Seriously, John has carved out for himself a niche practice as one of the foremost experts in the country on the formation of limited liability companies and the drafting of LLC operating agreements.
He shares his knowledge through his many lectures and publications, including his leading LLC formbook and practice manual, co-authored by Vernon Proctor, called Drafting Limited Liability Company Operating Agreements published by Wolters Kluwer, and his highly informative blog Cunningham on Operating Agreements. John also chaired the committee that wrote the New Hampshire Revised LLC Act enacted in 2013.
From a business divorce perspective, management deadlock is a recurrent problem and precipitator of litigation for LLCs with two equal members. I didn’t fully grasp the potential magnitude of the problem, however, until I read John’s recent article in the Wealth Counsel Quarterly called “Avoiding Deadlocks in LLC Operating Agreements” in which he cited an IRS statistic that 25% of all LLCs nationwide consist of two members. My own experience jibes with John’s article’s observation, that “the members of most two-member LLCs are equal in voting and profit shares,” and that
For all of these LLCs, the issue of deadlock is major. Even in the best two-member LLC, it is likely that deadlock issues will eventually arise, and can destroy an otherwise promising LLC.
John’s article goes on to suggest four, main types of deadlock-avoidance provisions to consider using in the operating agreements of two-member LLCs, including provisions for dispute resolution, “shotgun” buy-sell a/k/a “Texas shoot-out,” sale of the business, and drag-along/tag-along.
No short article or blog post can do adequate justice to the topic of LLC deadlock avoidance. For that reason I invited John onto my Business Divorce Roundtable podcast for an interview. You can listen to our half-hour discussion on the subject by clicking on the link provided at the bottom of this post.
John is an engaging speaker and I think you’ll enjoy listening to the interview which focuses on four questions:
- How important is the deadlock issue in LLC formation practice?
- How, in general, should lawyers address deadlocks with clients forming multi-member LLCs with two equal members?
- What types of specific provisions are recommended in operating agreements of LLCs with two equal members?
- What advice can lawyers provide when members of an LLC with two equal members cannot resolve deadlock under the operating agreement, and express their preference to duke it out in court?
You also can access here a memo prepared by John in which he outlines his answers to these questions.