Deadlock in LLCs with two equal members can be a major problem and trigger for dissolution proceedings, which is why it’s crucial to consider deadlock avoidance provisions in the operating agreement. This week’s New York Business Divorce, and a related podcast interview on the Business Divorce Roundtable, features noted LLC expert and attorney John Cunningham on the topic of LLC deadlock and how to avoid it.
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Hard to believe the two, 50/50 owners of a company with half a billion annual sales and $80 million profit can’t overcome their mutual antipathy, but that’s exactly what happened in Shawe v. Elting, a decision last week by the Delaware Chancery Court ordering the appointment of a custodian to sell the company. It’s in this week’s New York Business Divorce.
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Buy-sell agreements are commonly used to break fundamental deadlock in companies owned by 50/50 shareholders. This week’s New York Business Divorce examines a recent decision by Justice David Schmidt in Mintz v. Pazer in which he enforced an unusual buy-sell agreement that prompted a lawsuit over which side had the right to buy out the other.
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This week’s New York Business Divorce features Part One of a two-part online interview of Claudia Landeo, Associate Professor of Economics at the University of Alberta, and Kathryn Spier, Professor of Law at the Harvard Law School, on their collaborative article forthcoming in the Yale Journal on Regulation entitled “Shotguns and Deadlocks.” The interview explores the article’s thesis, supported by economic theory and data from laboratory experiments, that courts should make greater use of the shotgun buy-out mechanism to resolve deadlock dissolution cases, and should assign the role of offeror to the better-informed owner.
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The decision highlighted in this week’s New York Business Divorce may not be new, but it is one that deserves serious attention as a possible remedial template in deadlock dissolution cases, where one 50% owner with operational control uses it as a sword to force the other 50% owner to accept an under-valued buyout.
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