50/50 Business Partners in BC: Planning for Deadlock Before It Happens

Splitting a company 50/50 feels fair at the start. It also means that when the two owners disagree, neither can outvote the other, at the board table or at a shareholders' meeting.

This article looks at why equal companies stall, the tools owners can build in ahead of time, and the court remedies that remain if they do not.

Why a 50/50 company can stop dead

Most decisions in a company turn on a majority vote, at the board table and at shareholders' meetings. With two equal owners who are also the only two directors, a disagreement produces a tie at both levels.

The standard articles do not break the tie. Table 1 of the Business Corporations Regulation, a standard set of BC company articles, says in article 11.3 that questions at a directors' meeting are decided by majority and, if the votes are equal, the chair has no second or casting vote. Article 8.19 says the same for shareholders' meetings. Your company's articles may say something different, so they are the first thing to read.

A tie is not a problem when the owners agree on most things. It becomes one when the decision cannot wait: renewing a lease, approving a budget, hiring or firing a key employee, borrowing, or deciding whether to sell.

Tools you can build in ahead of time

The time to plan for deadlock is while the owners still get along. A shareholders' agreement, sometimes with matching changes to the articles, can include a ladder of steps. For an overview of what that agreement covers more broadly, see Shareholders' agreements in BC.

• A definition of deadlock. Which decisions count, and after how many failed votes or how many days.
• Escalation and cooling off. A required meeting, a written statement of each side's position, and a short pause before anything else happens.
• A casting vote. Giving the chair a casting vote, rotating the chair, or adding an independent third director for specific matters. Each changes the balance of power, so owners need to be comfortable with who holds it.
• Mediation. A neutral mediator helps the owners reach their own agreement. Nothing is imposed, and it is often quicker and cheaper than other options.
• Arbitration or a neutral decision maker. For defined issues, an arbitrator or another neutral person (for example, a valuator for price disputes) makes a binding decision. The agreement should say who appoints them, what they may decide and how fast.
• A last-resort exit. If the ladder fails, a buy-out or sale mechanism, or an agreed process to wind the company up, so that deadlock has an end point.

The drafting should match how the business actually runs. A deadlock clause that covers every decision can paralyse a company as surely as having none.

Keeping the business running during a dispute

While owners disagree, the company still has to pay staff, file returns and serve customers. Practical steps help:

• Agree in writing on routine authority, such as who signs cheques up to what amount, so the business can keep operating.
• Keep company records, banking and passwords accessible to both owners.
• Put proposals and objections in writing, and keep minutes of every meeting, including the ones that end in a tie.
• Avoid self-help, such as changing bank signing authority or locking the other owner out of systems, without advice.

If there is no plan: what the court can do

When owners cannot resolve a deadlock themselves, the Business Corporations Act gives the court two main routes. Both involve litigation, which is slow and costly, and the court, not either owner, decides the remedy.

The oppression remedy (section 227)

A shareholder may apply to court on the ground that the company's affairs are being conducted, or directors' powers exercised, in a manner oppressive to one or more shareholders, or that an act or resolution is unfairly prejudicial to them. The court may make any interim or final order it considers appropriate. The list in section 227(3) includes regulating the conduct of the company's affairs, appointing or removing directors, directing a shareholder to buy another's shares, and directing that the company be liquidated and dissolved. Under section 227(4), the court may make an order if satisfied the application was brought in a timely manner.

Whether a particular deadlock involves conduct that is oppressive or unfairly prejudicial depends on the facts, which is why early advice matters. For the remedy from a smaller owner's point of view, see Minority shareholder rights in a BC company.

Liquidation on just and equitable grounds (section 324)

Under section 324(1), a shareholder, director or other appropriate person may apply, and the court may order that the company be liquidated and dissolved if an event occurs that the articles say triggers liquidation, or if the court considers it just and equitable to do so. Section 324(3) lets the court make an order under section 227(3) instead where the applicant is entitled to relief either way. Winding up a working business is a blunt result, and a planned exit is usually far better for both owners.

Starting out, or already stuck?

If you are about to go into business 50/50, settle the deadlock plan before you sign anything else. If you are choosing a structure, see Going into business with a partner in BC. If you are already at an impasse, read your articles and any agreement first, then get advice before taking steps that could be hard to undo.

Equal owners? Agree how you will break a tie while you still agree

Our business lawyers can review your articles and shareholders' agreement, draft deadlock and dispute-resolution terms that suit how your company runs, and advise you if a deadlock has already set in.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.