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What Happens When Equal Shares Does Not Mean Equal Power?

In my last blog post, I explored the issue of equal pay among co-equal business partners, and how equal pay disputes can be remedied.  In this article, I look at the same issue from a slightly different perspective – whether shareholder power in a 50/50 company must always be equal.

If there are two 50/50 shareholders (or members in an LLC), they may have equal power as a matter of law.  But it is a very real phenomenon that some 50% owners can essentially evolve (or devolve) over time into de facto minority owners when it comes to true power, meaning input into the manner in which the company is being run.   Many times this spells doom, but it doesn’t have to.  When I counsel clients in this situation, I try to play Devil’s Advocate, and ask them to treat a potential business divorce as if it is an actual divorce, and the company is the child.  Then I ask the client to ask himself, what is in the best interest of the company?   What if the other owner has essentially become the “dominant” owner not because of a negative view of you, but because that is simply his or her personality?  Does that same personality, when directed toward the company, become an asset or a hindrance?

Critical self-analysis is not always pleasant, but I often ask clients to engage in it before going down the road of costly shareholder dispute litigation.  Sometimes it helps to attempt to look at things in a different light, or from someone else’s point of view.  Is your business partner as great as she thinks she is?  Is he really the Michael Jordan of your business?  If so, are you willing to be his Scottie Pippen?  Those two basketball greats won six championships together, and both went to the Hall of Fame.  Sometimes a client will see that his business partner really is providing tremendous value, and it would be foolish to insist on every single thing being precisely equal.  However, more often than not, it turns out that the business partner only thinks he is Michael Jordan, when he’s really more like a very good high school varsity player, and either a new understanding has to be reached or legal remedies must be explored.

Importantly, “legal remedies” does not necessarily mean business divorce litigation.  Negotiating a new shareholders’ agreement or operating agreement, where certain responsibilities are made the sole responsibility of one partner – not to be interfered with even by the dominant partner – can often resolve problems short of all-out war.

If you have a circumstance where something must be done to equalize the power between you and your business partner, you should seek out an experienced business divorce attorney who can help put you in the best position possible to resolve this imbalance, knowing that the threat of business divorce litigation may be the only way to get a power-hungry partner to give up any power at all.

If you have any questions about this post or any other related matters, please contact me at dcroberts@nmmlaw.com.