Shareholder Deadlock: When a 50/50 Partnership Breaks Down

“We’re best friends. Fifty-fifty is fairest.”

That may be the most common, and most expensive, sentence spoken when a small business is formed. A 50/50 split signals trust at the beginning. When the partnership breaks down, it means neither side can make any decision, including the decision to dissolve.

Where deadlock bites

The problem with a 50/50 company is not the argument. It is that the business still has to run after the argument. With two directors and two equal votes, nothing passes: no hiring, no lease, no loan, no distributions. The shareholders are equally split, so they cannot elect a new board. If the bank account requires two signatures, the company cannot even pay the electric bill. Meanwhile rent is due, employees expect to be paid and customers drift away. Deadlock costs money every single day.

Corporations: BCL § 1104

Business Corporation Law § 1104 addresses deadlock directly. Holders of one-half of the voting shares, so a 50% owner qualifies, may petition for dissolution when the board is deadlocked, when shareholders cannot elect directors, or when internal dissension makes dissolution beneficial. Dissolution is discretionary, and courts often give the parties a chance to resolve matters themselves first.

One crucial distinction: a petition under § 1104-a (shareholder oppression) triggers the § 1118 buyout election, but a pure § 1104 deadlock petition does not, by its terms. That means:

• If you want to be bought out, you may need a path that triggers the buyout mechanism.
• If you want to buy out your partner and keep running the business, a pure deadlock petition could push the company toward liquidation instead.

In practice, petitions often plead both grounds, and the first round of the fight is over which one applies. How the petition is written often determines who buys whom, and at what price.

LLCs: a different, harder standard

If your company is an LLC, the corporate rules do not carry over. LLC Law § 702 permits dissolution only when it is “not reasonably practicable” to carry on the business in conformity with the operating agreement. The Appellate Division made clear in Matter of 1545 Ocean Ave., LLC (2010) that this is a contractual test: showing that the members no longer get along is usually not enough. Courts will, however, sometimes order one member to buy out the other as an equitable remedy (Mizrahi v. Cohen, 2013).

Before going to court

Litigation is the slowest, most expensive and least predictable option. Mediation, a mutually trusted tie-breaker, dividing the business, or a negotiated buyout can each resolve a deadlock faster and preserve more value. Where one side is moving assets, emergency relief such as a temporary receiver is also available.

The real cure, though, comes earlier: deadlock and valuation provisions in the shareholders’ or operating agreement. See our article on the five shareholder agreement clauses most often overlooked.

Attorney’s perspective: how I approach these cases

The first thing I settle with a client in a deadlock case is: do you want to be the buyer or the seller? That decides which legal grounds we assert, in what order, and how we protect your negotiating position throughout the case.

The second priority is keeping the business alive during the dispute. Every day of deadlock erodes value that both owners will ultimately share. I typically propose interim operating rules early, covering who signs checks, who manages staff and which decisions need both owners, to protect the company and create room to negotiate. On valuation, I recommend getting a preliminary number from a qualified appraiser early, because nearly every 50/50 case eventually comes down to price.

Talk to me

If you and your partner are already deadlocked, or you are about to form a 50/50 company, call +1 718-218-5805 or schedule a consultation. Every company’s documents and facts are different, and we will discuss the approach that fits yours.

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

Back to all articles