In many parts of life, an even split is a symbol of trust and fairness. “Even-Steven”. “One for all and all for one”. So why do business lawyers dislike 50-50 governance and ownership in corporations and LLCs? The answer is: deadlock. If two shareholders cannot agree on a course of action, or when a board of directors cannot act because of a 50-50 split, the corporation can be paralyzed. Deadlocks can actually kill a company. As a result, many corporation statutes provide for procedures for breaking the log jam. In Delaware, Section 273 of the General Corporation Law outlines the solution for the dissolution of joint venture corporation having two stockholders. (Section 275 provides for general dissolution.) More fundamentally (and much cheaper and easier) is lawyers’ advice to clients to provide for some means of decision making other than “50-50”. This can be at the board level where an odd number of directors are required. Or, at the stockholder level, this problem can be addressed by voting agreements and voting trusts or by having a third shareholder own 1% or, in some cases, more elaborate tie-breaking mechanisms. As with many legal problems, the best way to avoid deadlock problems is to prevent them in the early stages of organization and documentation.
Why “50-50” Makes Lawyers Nervous
