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Court-Appointed “Referee” Could Help a Company Survive Shareholder Dispute Litigation

When fifty/fifty co-owners get embroiled in litigation over the fate of the company, can the company survive the litigation? For many prospective clients, this is the first question they ask when they come in for a consultation.

When one fifty percent shareholder wants to sue the other, the company is already in at least some form of trouble. Sometimes litigation commences because nothing can get done, which is known as a “deadlock.” More often, though, one shareholder sits back and, for the good of the company, allows his business partner more leeway than he deserves. For example, if your partner is the one taking more money out of the company than he should, he already has shown little regard for the company’s finances. If you react and push back, a deadlock could be the result, paralyzing the company. When one 50/50 owner digs in his heels, the company could come to a grinding halt.

What can be done, short of simply “taking it?”  One client last year was concerned that if he sued his business partner, his partner would stop making sales or stop doing the other things that were his responsibility. This would have been catastrophic for the company, so my client (before he became my client) did — absolutely nothing. For three years, he sat back in fear of what would happen if he confronted his partner. He knew he had no way to overrule him, since they were both fifty percent owners. After all, the partner who really cares about the best interest of the company is always at a disadvantage, since his business partner is not confined by the same ethical limitations.

We decided that the best strategy was to seek the appointment by the court of a Provisional Director to act as a referee. This is someone appointed by the court to break a tie on a directors’ vote. If one owner stopped making sales, the directors could vote to replace him as head of sales. If the Provisional Director agreed that your partner’s salary was too high, you would now have the votes needed to cut his salary. Just knowing that such a remedy existed was a godsend to my client.

In order to determine whether such a “tiebreaker” could help you and your company, ask yourself what I asked my client. If a neutral third party arbitrated the arguments you typically have with your business partner, who do you really, deep down, think would win? If you are the reasonable one, and your business partner is a selfish bully, chances are you would win most of the arguments if they were impartially refereed.

Many small to medium-sized business owners have no idea that such a court-appointed “referee” is even an option. If you have been contemplating litigation against your business partner, but are concerned with how the company could possibly be run when two shareholders are suing each other, you should seek legal advice from someone experienced in litigating shareholder disputes. You may come to realize that your company is not the first company to face such issues, and that the law has set up a system to deal with them.