What happens when the directors of a closely held corporation cannot agree on how to run the business? Absent a negotiated resolution, an avenue of last resort is to petition the court to dissolve the company under the corporate dissolution statute, G.L. c. 156D, § 14.30. Recently, the Massachusetts Supreme Judicial Court construed this statute for the first time and offered guidance on when a company may be dissolved over the objections of one or more owners.
The parties in Koshy v. Sachdev were close friends and equal business partners. Their relationship deteriorated when they could not agree on strategic and operational decisions for their company. The dispute escalated; at one point one partner shut off the other’s credit cards and changed the locks on company building. Each party tried to buy the other out, to no avail. Finally, Koshy brought suit in the Superior Court seeking to dissolve the company. The case went to trial but the dissolution claim was denied.
When the SJC took the case on appeal, it became the first time the Court would consider the corporate dissolution statute. It reversed the Superior Court’s decision, finding that dissolution may be available under these circumstances, and remanded the matter back to that court including consideration of “lesser remedies, such as a buyout or sale of the company as an ongoing entity.” for further consideration by the trial court. The Court also offered guidance for future cases in determining when dissolution is appropriate. First, a trial court must find that the directors are deadlocked in the management of corporate affairs. Factors to consider include the size of the corporation, whether corporate “paralysis” exists, and the extent of distrust and antipathy between directors. If a deadlock exists, dissolution is appropriate if the company’s shareholders are unable to break the deadlock and there is risk of irreparable injury to the corporation.
This case demonstrates that while dissolution is an available remedy to deadlocked business partners, not only is it an extreme result, but it may result in a court compelling an alternative remedy upon the parties. The best practice – especially in closely held corporations and 50-50 partnerships – is to anticipate potential deadlocks and prospectively agree on how to handle them rather than have a court impose a resolution. This may be accomplished by establishing dispute resolution procedures to resolve conflicts, or by negotiating a buy-sell agreement to separate the parties on business terms when an impasse occurs.
Our business lawyers are available to counsel closely held corporations to prevent and resolve deadlocks and to avoid dissolution actions. If you have questions about planning for these issues, or if you are involved in a business dispute, please contact any of the attorneys in our Business Law practice group.
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