Differences in opinion on how to achieve a stated goal in a closely held business can lead to disputes that block the enterprise from moving forward. Closely held businesses are characterized by a limited number of shareholders and a lack of public trading. The stakeholders in a corporation or limited liability company often face unique managerial challenges and when the decision makers are unable to agree on major operating or governance issues, a deadlock may occur. The inability to move forward can impede growth, demoralize staff, and, in worst-case scenarios, lead to business dissolution. To avoid a deadlock, the principals must take a proactive and strategic approach that may require compromise and collaboration. If the dispute remains as an obstacle for too long, it could take on a life of its own, snowball into much larger issues and sideline the founders’ initial goals.
The primary causes of a deadlock include equal ownership without an exit strategy, personal relationships or differing visions for the company. A disagreement over the company’s direction can be a significant source of conflict. Sometimes, the underlying reason for a business dispute can be related to personal issues by and among the principal owners. Economic issues: i.e., disputes relating to the allocation of resources, compensation, or the distribution of profits can often result in a deadlock which makes it impossible to move the company forward, creates a financial strain and damages the company’s reputation.
Major disputes among stakeholders can lead to litigation and become expensive to the enterprise. The end result of a deadlock will generally lead to a disruptive atmosphere and could result in irreparable harm to the business. The time spent on shareholder or member disputes distracts the parties from moving forward in a productive manner, damaging the reputation of the company, and reducing or eliminating profitability.
It is paramount for the owners of an enterprise to seek counsel regarding the structure of ownership and strategy to resolve personal, financial, and operational challenges. Creating an open dialogue is the cornerstone of any resolution and a willingness to resolve the issue is always better than hunkering down for a fight. The most important preventive measures include making certain that a detailed shareholder or operating agreement clearly outlines a path for resolving a major dispute. Defining the roles of the stakeholders early in the process will avoid confusion and/or paralysis.
Another mechanism for preventing a deadlock is to appoint an outside advisory board or agree – prior to starting the business – to designate alternating periods for the decision-making authority to move the business forward while resolving the differences among stakeholders.
Deadlocks in closely held businesses can be challenging and emotionally charged. However, if the parties step back to understand the root of the conflict and have a desire to facilitate open communication, the deadlocks can be addressed effectively to ensure the business’s continued growth and success.