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Court-Appointed “Tiebreakers” In a 50/50 Ownership Setting

When two people start a company, neither wants to give control to the other, so ownership is usually split 50/50.   This sounds like a great idea at the outset, when everyone is on the same page, and there is usually no other practical way to proceed.  But when you and your partner start having different ideas about the direction of the company, and significant trouble ensues, the law of New Jersey may provide the practical remedy that you are looking for.

Many business owners have a dispute with their partner that does not rise to the level of justifying oppressed minority shareholder litigation.  (Readers of this blog are well aware that minority shareholder rights apply even to 50/50 co-equal owners, who have every right to protection under the New Jersey statute as minority owners do.)  However, the dispute could still be dramatically disrupting the company and its operations, meaning that something must be done.  For example, what happens when one owner wants to take this year’s huge profit and invest it back into operations, and the other wants to distribute it to the two shareholders?  Or when one owner starts hiring family members to work for the company, but the other thinks this is a terrible idea, and that the family members are being paid way too much?

While such circumstances could, of course, lead to expensive shareholder dispute litigation, there are steps that do involve the court, but are far less costly and involved than a full-scale legal war.  In addition to being costly, full-blown litigation may not be practical, because the usual remedy for shareholder dispute litigation is a buyout.  Often is such cases, neither shareholder is looking to be bought out, or to buy out the other.  And certainly no one wants the company dissolved – another, more Draconian, remedy under New Jersey law.

As an alternative to such drastic relief, courts in New Jersey are empowered in both the corporate and LLC settings to appoint a custodian or provisional director (or manger, in the case of an LLC).   Such agents can essentially be seen as “tiebreakers” in the event of a deadlock on issues of great importance to the company.  For example, a court-appointed provisional manager could analyze what services the family member employees are providing and determine whether they are truly necessary, whether there are better qualified people available for the job, and whether a market rate of salary is being paid.  Sometimes, the mere filing of such a limited action – or even the threat of such a filing – will be enough to cause a recalcitrant business partner to rethink a questionable tactic.

New Jersey business owners considering such a strategy should keep in mind that the person appointed by the court is often an accountant or – God forbid – an attorney, who usually has no knowledge of your particular industry, and most often has never actually run a business.  The company will also be forced to pay the person’s fees, as it is not a free service provided by the Court.

Do not come away from this article thinking that such motions should be undertaken lightly.  Courts do not like to micromanage companies, and will not take kindly to such an application before all efforts to resolve the issue amicably have been exhausted.  A business divorce attorney with expertise in this area will help you make sure that you have made enough of an effort to resolve the issue that your application will not be viewed unfavorably by the court.

Of course, such a legal maneuver may not be undertaken without causing additional damage to the business partnership.  An attorney who regularly handles such cases should – if you are getting your money’s worth – be an excellent discussion partner to help you play out what the potential costs to the business relationship may be, and weigh them against the cost of doing nothing.