You’ve done it! You’ve finally thought of your million-dollar idea. You’ve created the prototype for your product, the Kangaroo Pouch for People. It’s like a fanny pack, but bigger. You’re ready to start building your company, but you’re nervous and feeling inexperienced. So you do what most people do – you invite your best friend Bob to become a 50% partner in the company with you.
Planning ahead by understanding ownership tiebreakers in New York can help prevent future conflicts.
Unfortunately, not every partnership is always smooth sailing. You should have a plan for if or when things go south, just in case. There are many options you can choose from to ensure that if your partnership leads to a disagreement and you both share the same power, that decisions can be made amicably and hopefully without legal action!
Contact the skilled attorneys at Chidatma Law Group for assistance in making sure your business is taken care of, no matter who is involved.
Precautionary Steps to Take When Starting a Small Business in New York
If you rely on other people to help with tiebreakers in your business:
- Appoint a custodian or provisional director or “rabbi” that you agree will act as a tie-breaker. This can be put in an operating agreement or bylaws.
- Hire a CEO who makes the larger company decisions, while still retaining equal, majority, and profitable ownership.
- Elect to form your partnership as a corporation and appoint at least three people on your board of directors, including the two partners, or another odd number.
- Create a 49/49/2 partnership. The 2% shareholder should be someone well-informed and trustworthy to make the tiebreaker decisions.
Issues can also be handled internally from the get-go:
- Assign partners 51/49 in decision making, but 50/50 in profits.
- Agree to have each person handle different departmental decision, or have one partner handle day-to-day issues and the other major decisions.
- Create an ad hoc board of directors that reviews and makes decisions on issues that owners can’t agree on.
- Include built-in mechanisms (similar to mutual assured destruction) in company documents that are bad for everyone so that it encourages each partner to avoid deadlock.
- Set a provision in the bylaws or operating agreement that provides for mediation or arbitration if the issue gets to that. This is typically the least amicable option and the con is this is like litigation.
- Provide for a buy/sell option in the operating agreement. There are multiple options available (see below).
What if you and Bob decide that you’re such tight besties, you didn’t take any of those precautionary steps? Several years later, you are making money hand over fist but there is a disagreement about something important – like selling the company or borrowing money. You still have some options!
Post-Disagreement Problem Solving – What Do We Do Next?
If you are having trouble making decisions about your company, some of the following tactics may be helpful:
- The simplest of decision-making tactics is often a coin flip! It may seem silly, but it’s certainly the fastest and the cheapest.
- Decide to take turns either by each decision or period of time.
- Although it may not be previously written in the company documents, you can decide to bring someone in to be the tiebreaker, like a neutral third partner who knows the company.
- Work out a buy/sell arrangement and allow for one partner to buy out the other. Some buy-sell agreement options include:
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- Russian Roulette/Open Dutch Auction: Remember when you and your sibling would fight over a piece of cake and your parents said you should cut it in half? She lets you cut the cake, but tells you that your sibling gets to pick the slice. You try to cut the cake as evenly as possible because of the fear they’ll take the bigger piece. Same concept here. One partner sends notice to the other naming a price they believe is the value of their half interest, and the receiving partner can buy it for that price or sell to the other party at that same price. The other partner being able to flip it keeps them reasonable.
- Texas Shoot Out/Closed Dutch Auction: Both partners send sealed bids with a price they would be willing to sell their 50% for, to a third neutral party. The higher bid wins and they must buy the other partner’s share at the lower price. For example, let’s bring the cake slices back. You tell your mom you would give Sally your slice for $3, but Sally tells mom she would only sell hers to you for $5. Sally gets the cake and only has to pay you $3.
- Fair Market Offer: One partner sends notice to the other about executing a buy/sell option. A neutral third party decides a fair market price for half and the partners decide who will buy.
- Baseball Arbitration: Both parties submit an amount they believe the entire company is worth. The party closest to the arbitrator’s number wins and buys the other partner’s half for half of the Company price.
- Balanced Fair Market Value: Again, one partner sends notice, and the third party picks a fair market value for half. The partner who sent notice must buy the other partners shared at a premium of the FMV or sell their own at a discounted value. You agree to a 15% — or whatever – enhancer in advance.
At the end of the day, if you and Bob really can’t sort out your issues cleanly, expensive and time-consuming litigation may sadly have to be the road you take. As a last resort, if after that the company can’t function properly after the drama and the bickering, dissolving or selling the company may have to be considered, too. Mankind will have to live another day without their Kangaroo Pouches unfortunately.
Contact Chidatma Law Group Today
Conveniently located in New York City, our business lawyers will make you our priority and put your mind at ease. We will answer your questions, evaluate your circumstances, and discuss your options. Contact us to discuss your matter confidentially.
Frequently Asked Questions About 50/50 Business Ownership Deadlocks in New York
1. What happens if 50/50 business partners in New York can’t agree on a major decision?
When partners share equal ownership and voting power, a disagreement can create a “deadlock.” This often happens when there’s no tiebreaker provision in the operating agreement or bylaws. If the dispute involves major issues like selling the company, taking on debt, or admitting new partners, the business can become paralyzed. In serious cases, a court may appoint a custodian or even order dissolution.
2. Can a court dissolve a 50/50 owned company in New York due to deadlock?
Yes, under New York law, courts can dissolve corporations and LLCs if management is so divided that the business cannot function effectively. For corporations, this falls under the New York Business Corporation Law. For LLCs, courts look at whether it is reasonably practicable for the business to continue operating. Litigation, however, is often expensive and disruptive, which is why most business owners prefer negotiated buyouts or structured tiebreaker mechanisms.
3. What is a buy-sell agreement and why is it important in a 50/50 partnership?
A buy-sell agreement is a contract provision that outlines how one partner can buy out the other if disputes arise. In a 50/50 ownership structure, buy-sell provisions are especially important because neither partner has majority control. Mechanisms like a Russian Roulette clause, Texas Shoot Out, or Baseball Arbitration create structured ways to determine price and ownership transfer. These agreements reduce uncertainty and discourage unreasonable valuations.
4. What is a “Texas Shoot Out” clause in a New York business agreement?
A Texas Shoot Out (also known as a closed Dutch auction) is a buy-sell mechanism where both partners submit sealed bids stating the price at which they would sell their 50% interest. The higher bidder purchases the other partner’s share at the lower price. This structure encourages realistic valuations because each partner risks becoming either the buyer or seller at their own stated number.
5. Is mediation or arbitration required before filing a lawsuit in a business dispute?
It depends on what the operating agreement or bylaws say. Many New York small businesses include mandatory mediation or arbitration clauses requiring partners to attempt alternative dispute resolution before filing suit. Mediation can preserve relationships and reduce costs, while arbitration functions more like private litigation. If no such clause exists, partners may go directly to court.
6. Can we appoint a neutral third party to break a 50/50 ownership tie?
Yes, even if your company documents don’t already provide for one, partners can mutually agree to appoint a neutral third party to act as a tiebreaker. This could be an independent director, a trusted industry professional, or a provisional director appointed by a court if necessary. This option is often faster and less adversarial than formal litigation.
7. What if we never created an operating agreement for our 50/50 LLC?
If no operating agreement exists, New York’s default LLC laws apply. Unfortunately, those statutes do not provide simple built-in deadlock solutions. Without contractual guidance, disputes often escalate into litigation.
8. How can we prevent a 50/50 ownership dispute before it starts?
Prevention starts with careful planning and options include:
- Creating a 49/49/2 ownership structure with a trusted minority shareholder
- Appointing an odd-numbered board of directors
- Dividing decision-making authority by department
- Including buy-sell and valuation mechanisms
- Adding mediation or arbitration clauses
Clear documentation of roles, responsibilities, and exit strategies significantly reduces the risk of destructive deadlocks.
9. Is litigation the only option if we cannot resolve our business dispute?
No, but it may become necessary if negotiations fail. Litigation can result in court-ordered buyouts, appointment of a receiver, or judicial dissolution. However, it is typically time-consuming, public and expensive. Most business partners prefer structured buyouts or negotiated settlements whenever possible.
