Breaking through Deadlock! Possible tie breaking mechanisms for business and estate planning purposes
by Kaamil Khan
As the old saying goes, “Two heads are better than one.” There are many great reasons to have multiple people involved when making decisions for your organization or even when administering your estate. However, it must be accepted that no two individuals will always agree on everything.
Whether these people area acting as co-executors for an estate, members in a limited liability company, or partners in a partnership, it is essential that a procedure for resolving deadlocks and tie votes is included in the underlying documents. Read below for a summary of possible tie breaking mechanisms that you can use.
A. One Person as the Controlling Vote
When there are an even number of decision makers, one of these people can be designated as the controlling vote. Such power should usually be provided to the highest-ranking member or partner or perhaps the one who has made the greatest financial contribution to the organization. For estate planning situations with family members, perhaps the oldest person could serve as such vote.
However, allowing one person to serve as the tie breaker can lead to an imbalance of power and make the other members or agents feel that they lack true control as they could possibly be out voted on many major decisions. With just two people serving, this would definitely not be the best tie-breaking procedure.
B. Arbitration or Mediation
Your Operating Agreement or By Laws can provide for binding arbitration or mediation when a majority vote cannot be reached. This allows for a neutral decision maker to consider the evidence and arguments of both sides as to which choice is best for the organization.
However, arbitration can be expensive. Also, with either arbitration or mediation, there will be a time delay before the decision can be implemented. For time-sensitive matters, this is not the most practical of solutions. A cheaper alternative, especially for small businesses and start ups, may be the Third Party Tie Breaker outlined in Section C.
C. Third Party Tie Breaker
A Third Party Tie Breaker is a practial and cost-effective tie breaking mechanism for either business or estate planning purposes. In the Operating Agreement or By Laws, all members or shareholders should delegate this controlling vote to a specified third person. The testator of a will or the settlor of a trust can choose this person when drafting their documents.
The main issue with this method will be selecting this third party. Business people may want to use a mentor or another fellow respected entreprenuer. For estate planning situations, another close family member should be asked to serve in such a role.
You should carefully consider who you would like to use as this third party tie breaker. This person should be someone who can relate to all the parties involved and should not have a stronger relationship with nor favor one party over the other. The person selected should also be patient, willing to take the time to hear both sides, and provide the tie-breaking vote after careful calculation.
D. Alternative Methods
Some believe that when making important decisions, they should let fate decide and just flip a coin. For example, this was how Gilbert Arenas chose the Washington Wizards over the Los Angeles Clippers. However, I personally belive that your business or estate planning needs require some more careful and deliberate consideration.
Another alternative could be “Rock, Paper, Scissors.” A federal judge once even imposed such a method as a tie-breaker between two attorneys would could not come to an agreement over a discovery dispute!
The website Lowering the Bar has provided this very legally sound proposed provision:
Voting Deadlock. In the event of a deadlock in the vote of the members or managers, the decision shall be made using the method of “paper, rock and scissors.” A representative of each side of the issue shall face each other with their arms in a right angle of 90 degrees as the elbow with fists closed and the right fist on top of the left fist. An independent participant, if available, or either of the representatives will be responsible to count to three in approximately one (1) second intervals. With each count, each representative shall lightly touch the left fist with the right fist to the cadence of the count and, at the count of three, each representative will signify whether he or she is selecting “paper,” “rock,” or “scissors.” “Paper” shall be represented by the right hand fully extended, palm down. “Rock” shall be represented by the right hand in a full fist. “Scissors” shall be represented with the right hand in a fist with the index and third finger extended. The outcome of the issue shall be decided by the representative who wins the contest by the best two out of three sessions using the following rules:
i. A display of paper defeats a display of rock;
ii. A display of rock defeats a display of scissors; and
iii. A display of scissors defeats a display of paper.
The winning representative shall decide the issue conclusively on behalf of the company.
But in the end, while humorous, neither of these methods really solve the problem at hand and are not truly practical solutions for business partners and co-agents.
The easiest method to avoid having a deadlock or a tie is to have an odd number of individuals with voting power. However, if proper planning is taken at the beginning before any actual conflicts have arisen, just two people or another even number can act effectively for your business or estate. Before implementing any tie-breaking mechanism, the needs of the organization as well as the cost, practicality, and any possible temporal delay should be carefully considered.
If you have questions when forming your business with a partner or whether multiple people should serve as agents in your estate, contact K.M. Khan Law today.